POLLUTION TRADING AND ENVIRONMENTAL INJUSTICE: LOS ANGELES’ FAILED EXPERIMENT IN AIR QUALITY POLICY
* ** RICHARD TOSHIYUKI DRURY MICHAEL E. BELLIVEAU *** **** J. SCOTT KUHN AND SHIPRA BANSAL
It is the nature of all greatness not to be exact, and great trade will always be attended with considerable abuses.1 Edmund Burke
TABLE OF CONTENTS
INTRODUCTION ...... 233
I. FROM THEORY TO PRACTICE: THE GROWING RELIANCE ON POLLUTION TRADING ...... 236 A. Pollution Trading in Theory...... 236 B. A Growing Reliance on Pollution Trading...... 239
II. LOS ANGELES: A TEST MARKET FOR AIR POLLUTION TRADING ...... 242 A. Pollution Trading Comes of Age in Los Angeles: From Rule 1610 to RECLAIM and Beyond...... 245 B. The Harsh Reality: Problems with Pollution Trading in Los Angeles ...... 251 1. Toxic Hot-spots and Environmental Injustice: The Mad Science of Pollution Trading ...... 251 2. Market Incentives Run Amok: Fraud and Manipulation ...... 258 3. Distortion of the Market: Hot Air and Phantom Reductions...... 263
* Richard Toshiyuki Drury, J.D. Yale Law School, 1990, is the Legal Director of Com- munities for a Better Environment (CBE), San Francisco, California. ** Michael Belliveau, B.S. Massachusetts Institute of Technology, 1979, former CBE Ex- ecutive Director, is the Director of Just Economics for Environmental Health. *** J. Scott Kuhn, J.D. Hastings Law School, 1997, is a Staff Attorney with CBE. **** Shipra Bansal, B.S. University of California - Berkeley, 1994, is a Staff Scientist with CBE. We thank Anne Simon for her review and insightful comments. This article may be ac- cessed via the World-Wide Web at
231 232 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231
III. THE TROUBLE WITH TRADING ...... 268 A. Morality and the ‘Right’ to Pollute...... 270 B. Environmental Injustice...... 271 C. Pollution Trading: Many Promises; Poor Results ...... 274 1. Pollution Trading Does Not Reduce Pollution Effectively...... 274 2. Innovation Suffers Under a Pollution Trading Regime ...... 275 3. Public Participation Suffers Under a Pollution Trading Regime...... 278 4. Monitoring and Enforcement Are More Difficult Under a Pollution Trading Regime...... 279
IV. RECOMMENDATIONS AND IMPLICATIONS...... 283 A. Proposals for Urban Air Pollution Trading Programs...... 283 1. Prohibit Toxic Trading ...... 283 2. Prohibit Trading Into Overburdened Communities ...... 284 3. Assess and Prevent Toxic Hot-spots and Discriminatory Impacts...... 284 4. Prohibit Trading Out of Reasonably Available Control Technology (RACT) Requirements...... 284 5. Prohibit Cross-Pollutant Trading...... 285 6. Allow Affected Communities to Review and Comment on Proposed Trade ...... 285 7. Ban Inter-Source Trading...... 285 8. Prohibit Hot Air Credits That Result From Over- Allocating the Baseline ...... 286 B. Implications for the Climate Change Policy Debate ...... 286 C. Alternative Market-Based Policy Approaches...... 288
CONCLUSION ...... 289 Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 233
INTRODUCTION Pollution trading2 has been touted as a great innovation in envi- ronmental policy making3 and a key tool for sustainable develop- ment.4 Pollution trading allows a polluter to forego reductions in pollution (or increase pollution) at its own facility in exchange for re- ducing emissions elsewhere or by purchasing credits which represent someone else’s pollution reduction.5 Pollution trading advocates ar- gue that this approach saves money, promotes innovative technology, and continuously reduces pollution through market incentives. In contrast, they claim that technology-based regulations, commonly re- ferred to as ‘command and control’, are economically inefficient and rigidly over-prescriptive.6
2. “Pollution trading” is used interchangeably with “emissions trading” to refer to one kind of market-based environmental policy tool that provides for the buying, selling, and use of emission reduction credits to more cost-effectively reduce pollution. These programs have also been called marketable permit programs or permit trading. 3.See Jeremy B. Hockenstein et al., Crafting the Next Generation of Market-Based Envi- ronmental Tools, ENVIRONMENT, May 1997, at 13-14. Pollution trading stands distinct from other market-based environmental policies, which include eliminating government subsidies, charging pollution fees, using a deposit refund system on products and reducing other market barriers. 4.See HERMAN E. DALY, BEYOND GROWTH: THE ECONOMICS OF SUSTAINABLE DEVELOPMENT 222-224 (1996) (“[T]he paradigm policy for solving the allocation, distribution, and scale problems seems . . . to be the tradable permit plan.”). According to Daly, economic policy for sustainable development must solve three separate problems: efficient allocation of resources for production, fair and adequate distribution of resources to people, and setting an optimal scale of resource use at a point beyond which further growth costs more than it is worth. See id. at 222. Daly sees great virtue in the tradable permit scheme because it forces us to recognize and address these three problems separately through three independent policy instruments. See id. at 224. It requires the scale and distribution problems to be decided so- cially before relying on the competitive market to work out the allocation problem individualis- tically. See id. Daly calls the term sustainable development “dangerously vague” and some- thing that “everyone likes, but nobody is sure of what it means.” See id. at 1. The United Nations-sponsored Brundtland Commission report, Our Common Future, defined the term as development which meets the needs of the present without sacrificing the ability of the future to meet its needs. See id. 5. All the various forms of pollution trading incorporate this feature, including offsets and bubbles for new and existing sources of air pollution (see infra Part I.B), declining cap-and- trade programs, such as RECLAIM, see infra Part II.A, and open market trading programs, such as car scrapping Rule 1610, see infra Part II.A. 6. See David M. Driesen, Is Emissions Trading an Economic Incentive Program? Re- placing the Command and Control/Economic Incentive Dichotomy, 55 WASH. & LEE L. REV. 289, 296-97, 306-7 (1998) [hereinafter Driesen, Emissions Trading] (“[Proponents of economic incentives hold] that command and control regulation generates unnecessarily high compliance costs because the regulator, instead of deciding only how much pollution reduction to demand, also specifies the technologies and methods firms must use to control pollution. This may prove inefficient because the polluter knows its facility better than the regulator and can de- termine how to deliver any given decrease in pollution more efficiently than the regulator.” 234 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231
Pollution trading has received strong support from several quar- ters. Many in academia, industry, and some environmental organiza- tions such as the Environmental Defense Fund, have endorsed pollu- tion trading strategies. The United States government has also grown increasingly reliant on pollution trading to address domestic air pol- lution problems.7 Furthermore, the United States has successfully foisted pollution trading on the rest of world as a policy tool to com- bat climate change, despite strong opposition from developing coun- tries and some environmentalists.8 Academics, in particular, have been fascinated with pollution trading for decades. A vast body of academic literature discusses the theory and virtues of pollution trading,9 especially its promise of iden- tifying the most cost effective means to reduce pollution.10 Some arti- cles approach this subject with an almost religious fervor, praising the ability of pollution trading to harness the forces of the free market for the good of the environment.11 However, fewer studies have ex-
Furthermore, “because facilities have unequal compliance costs, uniform standards demand relatively expensive reductions from some facilities without securing greater reductions from facilities with lower compliance costs. Hence, uniform standards may use private sector re- sources that are devoted to pollution control inefficiently.”); Hockenstein et al., supra note 3, at 14-15. 7. See discussion infra Part I.B on the growing U.S. reliance on pollution trading. 8. See David M. Driesen, Free Lunch or Cheap Fix?: The Emissions Trading Idea and the Climate Change Convention, 26 B.C. ENVTL. AFF. L. REV. 1, 18-35 (1998) [hereinafter Driesen, Cheap Fix?] (reviewing the evolution of trading, including joint implementation, in the Frame- work Convention on Climate Change); Jonathan Baert Wiener, Global Environmental Regula- tion: Instrument Choice in Legal Context, 108 YALE L.J. 677, 704-13, 735-83, 798-800 (summarizing the use of different regulatory instruments at the international level and arguing that global environmental protection should presumptively favor quantity-based tradeable al- lowances, due to the unique legal framework that exists at the international level). See infra Part IV.B. for the implications of pollution trading for climate change policy. 9.See Lisa Heinzerling, Selling Pollution, Forcing Democracy, 14 STAN. ENVTL. L.J. 300, 301, n.3 (1995) (describing support for market-based pollution regulations); Symposium, Free Market Environmentalism: The Role of the Market in Environmental Protection, 14 HARV. J.L. & PUB. POL’Y 297 (1992) (surveying market-based regulations). 10.See Bruce A. Ackerman & Richard B. Stewart, Reforming Environmental Law, 37 STAN. L. REV. 1333, 1346 (1985) [hereinafter Ackerman & Stewart, Reforming Environmental Law (I)] (arguing that market-based pollution trading programs will save billions of dollars an- nually). 11. See, e.g., Bruce A. Ackerman & Richard B. Stewart, Reforming Environmental Law: The Democratic Case for Market Incentives, 13 COLUM. J. ENVTL. L. 171, 179-88 (1988) [hereinafter Ackerman & Stewart, Reforming Environmental Law (II)]; Richard B. Stewart, Controlling Environmental Risks Through Economic Incentives, 13 COLUM. J. ENVTL. L. 153, 158-62 (1988); Cass Sunstein, Democratizing America Through Law, 25 SUFFOLK U. L. REV. 949, 964-66 (1991); Driesen, Emisssions Trading, supra note 6, at 295 (noting “the quasi- religious faith in programs labeled economic incentives and [the] demonization of traditional regulation”). Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 235 amined the empirical evidence of what occurs on the ground as a re- sult of trading.12 This article analyzes two of the most developed pollution trading programs in the world—Mobile Source Credits (specifically, the Rule 1610 “car scrapping” program) and RECLAIM. Both programs benefit large industrial polluters in the Los Angeles area, and have been in place for more than five years. Although industry has saved money, these air pollution trading programs have otherwise failed to deliver. The promises of pollution trading advocates have not come to pass. Pollution trading in Los Angeles has led to concentrated toxic air emission hot-spots that have shackled low-income and minority communities with the region’s air pollution. Pollution reductions have been far less than those promised by trading proponents. Fur- thermore, pollution trading has virtually eliminated public participa- tion in the environmental decision-making process. The lessons learned from the Los Angeles pollution trading experiments should inform decision making in the development and reform of domestic and international emissions trading programs. Part I of this article reviews the theoretical basis for emissions trading programs. This part also examines the trend, especially in the last decade, of increased regulatory reliance on such market incentive programs. Part II describes how air emissions trading programs have evolved in the metropolitan Los Angeles area of the South Coast Air Basin. This part then describes the harsh reality of emissions trading based on the early results of the Los Angeles experiments and intro- duces the environmental justice concerns that have called attention to the programs’ shortcomings. The Los Angeles emissions trading programs have resulted in adverse public health impacts, fraud, and manipulation of the trading market to reward the worst polluters. Part III criticizes emissions trading by drawing on the Los An- geles experience and examines the immorality, injustice, and ineffec- tiveness of pollution trading. Pollution trading undermines moral claims that pollution is wrong by creating a ‘right’ to pollute. It cre- ates environmentally unjust outcomes by placing a disproportionate
12. For a few empirical surveys of emissions trading see Robert W. Hahn & Gordon L Hester, Marketable Permits: Lessons for Theory and Practice, 16 ECOLOGY. L. Q. 361, 381-91 (1989) (trading lead credits to reduce lead in gasoline successfully reduced costs but delayed compliance); Driesen, Emissions Trading, supra note 6, at 311-18 (reviewing pollution trading’s mixed record of environmental performance). 236 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 burden of the region’s air pollution on low-income communities, a majority of which are ethnic and racial minorities. Finally, as demon- strated in Los Angeles, pollution trading makes for ineffective air quality policy in at least four ways: 1) it does not significantly reduce air pollution; 2) it does not spur technological innovation; 3) it de- creases public participation in environmental decision-making; and 4) it increases the difficulty of monitoring and enforcing emission reduc- tions. Part IV presents recommendations for reforming or altering emissions trading proposals. This part also examines the implications of pollution trading in a broader context than Los Angeles. A de- tailed proposal to reform urban air pollution trading programs is pre- sented. Also, this part examines the policy implications of emissions trading for the global climate change debate. Finally, this part briefly outlines other market-based policy tools that may prevent the prob- lems associated with pollution trading, while still realizing the goal of enhancing economic efficiency.
I. FROM THEORY TO PRACTICE: THE GROWING RELIANCE ON POLLUTION TRADING The attraction of pollution trading lies in its promise to reduce pollution as effectively as mandatory regulations, but with less ex- pense. Advocates argue that a trading strategy increases the range of options for industrial plants. They claim trading encourages some plants to reduce extra pollution now through innovation, while it al- lows others to wait until later to reduce pollution, when reductions are more cost effective. Thus, pollution trading provides regulatory flexibility, allowing industry to simultaneously increase profits and produce a healthier environment.
A. Pollution Trading In Theory Traditionally, industrial air pollution has been reduced through government regulatory programs that set emissions standards achiev- able through available pollution control technology. Critics of tech- nology-based regulations assert that this traditional “command and control” approach actually prescribes the pollution control technol- ogy that must be installed at each facility or every category of facil- ity.13 While command and control regulation might achieve the de-
13.See Driesen, Emissions Trading, supra note 6, at 296; Perry S. Goldschein, Going Mo- bile: Emissions Trading Gets a Boost from Mobile Source Emission Reduction Credits, 13 Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 237 sired outcome, industry and many economists contend that such regulation is highly inflexible, creating unnecessarily costly (economically inefficient) outcomes. The following illustration shows the theoretical advantages of emissions trading programs in achieving economic efficiency. The government mandates that certain industrial air emissions be reduced by fifty percent, a level determined to be achievable through the use of the best available pollution control technology.14 Imagine three industrial plants, with equal amounts of air emissions, which can readily meet the pollution reduction goal, but which have different compliance costs. Plant A can easily switch fuels at a low cost. Plant B, if applying existing technology, has medium compliance costs. Plant C faces high costs due to the difficulty of retrofitting its old equipment and its inability to switch fuels. If each plant were re- quired to meet the same pollution reduction goal simultaneously, some would face higher marginal costs of compliance. Thus, many economists hold that inflexible, technology-based regulation results in economic inefficiency by requiring costly compliance regardless of the availability of more cost-effective pollution reductions from other sources.15 Pollution trading supposedly solves this problem by allowing the three hypothetical facilities to buy and sell the right to pollute. The choice of a permissible level of pollution and the issuance of pollu- tion reduction credits are central program elements. Under a mar- ket-based scheme, rather than prescribe mandatory reductions at each plant based on a particular technology fix, the government sim- ply mandates the overall outcome desired—for example, a fifty per- cent reduction in emissions from all sources combined. To reach that
UCLA J. ENVTL. L. & POL’Y 225, 230 (1994/95). However, Driesen argues that critics are wrong; technology-based regulations set performance standards that can be met by any means chosen by the polluter. See id. at 297-304. 14. Often, traditional environmental regulation has required pollution to be reduced by amounts achievable through the use of control technology already proven to be effective, af- fordable, and already in use to some degree. For example, the Clean Air Act requires that Reasonably Available Control Technology (RACT) be used by existing sources to reduce air pollution, while new industrial plants must comply with the Lowest Achievable Emission Rate (LAER) through more state of the art controls. See ROBERT V. PERCIVAL ET AL., ENVI- RONMENTAL REGULATION: LAW, SCIENCE, AND POLICY 776-77 (2d ed. 1996). 15.See Hockenstein et al., supra note 3, at 14 (“[Command-and-control] regulations force all firms to shoulder identical shares of the mitigation burden, regardless of the relative costs of this burden to them. This is a significant drawback because experience has shown that some firms can lower pollution at much less cost than others. Thus, while the command-and-control approach can effectively limit emissions of pollutants, it typically exacts unduly high societal costs in the process.”). 238 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 goal, each facility is granted “emissions credits” allowing that facility to release exactly fifty percent of its current level of pollution. The facilities can then decide how they will reach that fifty percent goal. If a facility can reduce its emissions by more than fifty percent, then it can sell its surplus credits. Facilities have an economic incentive to reduce their pollution to the maximum extent possible, since any ex- cess reductions generate credits that can be sold to other facilities. Returning to the above example, Plant A reduces its emissions by seventy-five percent by switching to cleaner burning fuels. Plant B develops an innovative, inexpensive pollution control technology, enabling it to reduce emissions by seventy-five percent. Plant C, faced with a relatively high cost of control, decides that it is too ex- pensive to reduce emissions at all. Instead, Plant C purchases emis- sion reduction credits from Plant A and Plant B, both of which re- duced emissions by an extra twenty-five percent beyond the required minimum. The overall result is an emissions reduction equal to what would have been achieved through the command and control model, but at a much lower cost to industry. Thus, by harnessing free market forces and by expanding industry’s compliance options, the emissions trading market has achieved the most economically efficient reduc- tion in emissions—“more bang for the buck.”16 This model can be replicated beyond the three hypothetical utilities in the above exam- ple to include all facilities in a particular region, state, country, or even the entire international community.17 Although cost savings for industry have motivated further reli- ance on pollution trading, scholars have developed several other theoretical arguments favoring emissions trading. Foremost among these is the notion that pollution trading stimulates continuous tech- nological innovation to reduce emissions.18 Over time, as credits be- come scarce and their prices rise, “emissions trading gives plant man-
16.See John J. Fialka, Breathing Easy: Clear Skies are Goal as Pollution is Turned into a Commodity, WALL ST. J., Oct. 3, 1997, at A1 (discussing how Wisconsin Electric Power Co. saved $100 million by buying pollution credits from other industries that had reduced their sul- fur dioxide emissions instead of installing scrubbers); Ackerman & Stewart, Reforming Envi- ronmental Law (I), supra note 10, at 1348 (noting that “the Clean Air Act bubble policy alone, in limited use for only a few years, has achieved compliance cost savings of over $700 million without and reduction (and in some cases an increase) in pollution control”). 17. Global trading in carbon dioxide credits was called for in the Kyoto Protocol to the United Nations Framework Convention on Climate Change. See generally Driesen, Cheap Fix?, supra note 8. 18.See Daniel J. Dudek & John Palmisano, Emissions Trading: Why is this Thoroughbred Hobbled?, 13 COLUM. J. ENVTL. L., 217, 219-23 (1988); Ackerman & Stewart, Reforming Envi- ronmental Law (II), supra note 11, at 171-72. Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 239 agers the opportunity and incentive to use existing technologies, pro- duction, process, operations, and maintenance changes in new ways which invariably result in more emission control for less money!”19 Furthermore, some pollution trading programs are more demo- cratic than traditional command and control regulations.20 Sunstein, Ackerman and Stewart argue that market-based regulations will help to reclaim community control over decisions about the environ- ment.21 They further argue that adoption of trading programs will encourage public participation and promote reasoned deliberation by elected officials about environmental goals.22 Sunstein suggests that a system based on economic incentives leaves “little room for interest- group maneuvering . . . [and] puts the power of deciding pollution levels back into the hands of the citizenry.”23
B. A Growing Reliance on Pollution Trading Pollution trading has grown from its meager beginnings as an academic theory to become a major policy tool in both domestic and international strategies to reduce harmful pollution. This growing reliance demonstrates the political support for pollution trading, but belies the emerging evidence of its real problems. The history of environmental policy making over the last thirty years reveals an ongoing political tension between advocates of gov- ernment regulation and supporters of unchecked commercial enter- prise.24 Economists suggested that market incentives, like pollution trading, or disincentives, like pollution taxes, would be more efficient than regulation. Yet, this view was not reflected in the pioneering
19. Dudek & Palmisano, supra note 18, at 235. But see infra Parts III.B.2-III.B.3. 20.See Heinzerling, supra note 9, at 311-14; Ackerman & Stewart, Reforming Environ- mental Law (I), supra note 10, at 1353-55; Stewart, supra note 11, at 160, 164; Sunstein, supra note 11, at 966-68. 21. See Heinzerling, supra note 9, at 302 (noting that Cass Sunstein, Bruce Ackerman, and Richard B. Stewart have suggested that pollution trading programs are superior to technology- based regulations from a democratic perspective because they begin with an explicit discussion about what level of pollution is acceptable); Stewart, supra note 11, at 160, 164; Sunstein, supra note 11, at 966-68. But see discussion infra Part III.C..3. 22. See Heinzerling, supra note 9, at 302. 23. Sunstein, supra note 11, at 967. 24. See generally PHILIP SHABECOFF, A FIERCE GREEN FIRE: THE AMERICAN EN- VIRONMENTAL MOVEMENT (1993); MARK DOWIE, LOSING GROUND: AMERICAN ENVI- RONMENTALISM AT THE CLOSE OF THE TWENTIETH CENTURY (1995); ROBERT GOTTLIEB, FORCING THE SPRING: THE TRANSFORMATION OF THE AMERICAN ENVIRONMENTAL MOVEMENT (1993). 240 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 environmental legislation of the early 1970s.25 However, amidst a growing political backlash against environmental regulations in the late 1970s and 1980s,26 early forms of pollution trading gradually de- veloped.27 In the 1990s, these programs have grown explosively, driven by strong industry opposition to regulatory mandates and by an alliance forged between business interests and some national envi- ronmental groups.28 The first major emissions trading program, adopted in 1976 by EPA, allowed new stationary sources of air pollution (e.g. industrial plants) to be built in exchange for “offsets” that reduced air pollution by a greater amount from other sources in the same region.29 A more controversial trading program soon followed called “netting,” which used surplus emission reductions at an existing plant to offset in- creased pollution from expanded operations at the same facility.30 Then, in 1979, a “bubble policy” was adopted by EPA to allow exist- ing industrial polluters to meet pollution reduction goals in the ag- gregate through any combination of on-site emissions reductions.31 In 1984, by upholding EPA’s broad definition of an air pollution source, the Supreme Court endorsed the use of netting and bubbles.32 EPA memorialized these limited trading practices in its Emissions Trading Policy Statement, which included guidance on the use and banking of emission reduction credits.33 In the 1980s, academics actively advanced the ideal of cost- effectiveness in environmental policy; they attacked technology- based regulations and pushed for expanded market incentive pro- grams.34 Their influence could be seen in a 1988 report by a biparti-
25. See Hockenstein et al., supra note 3, at 14. 26. See SHABECOFF, supra note 24, at 203-30; GOTTLIEB, supra note 24, at 117-61. 27. See generally, Dudek & Palmisano, supra note 18. 28. See SHABECOFF, supra note 24 at 258-60; DOWIE, supra note 24, at 105-17; GOTTLIEB, supra note 24, at 160-61. 29. See Dudek & Palmisano, supra note 18, at 224-25. 30. This results in “no net increase” in emissions but allows avoidance of pollution control responsibilities. See id. at 225-26. 31. See id. at 227. 32. See Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 866 (1984) (holding “that the EPA's definition of the term ‘source’ is a permissible construction of the statute which seeks to accommodate progress in reducing air pollution with economic growth”). 33. Emissions Trading Policy Statement, 51 Fed. Reg. 43,814 (1986); see Dudek & Palmisano, supra note 18, at 228. 34. See, e.g., Ackerman & Stewart, Reforming Environmental Law (I), supra note 10, at 1341-42 (“A system of tradeable rights will tend to bring about a least-cost allocation of control Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 241 san group called Project 88, which proposed economic incentives as a centerpiece of future environmental policy.35 This report helped lead to the passage of the Clean Air Act Amendments of 1990. This leg- islation established a national pollution trading program for sulfur dioxide emissions from power plants to curb acid rain.36 The 1990 Amendments also authorized states and regions to develop Eco- nomic Incentive Programs (EIPs), including emissions trading, as central policy strategies for reducing urban smog.37 In the 1990s, support for emissions trading has grown. EPA and Congress have expanded significantly the use of emissions trading to combat urban smog.38 The Clinton Administration has expressed strong support for market-based approaches, particularly pollution trading.39 Many scholars and economists are aggressively calling for the expansion of market-based regulations.40 Environmental regula- burdens . . . . It will . . . reduce the incentives for litigation, simplify the issues in controversy, and facilitate more intelligent setting of priorities.”). 35.See Sherri Bittenberg & Robert Stavins, Project 88: Harnessing Market Forces to Pro- tect Our Environment, HARVARD ENERGY AND ENVIRONMENTAL POLICY CENTER WORKING PAPER (1989); Thomas J. Graff, Harnessing Market Forces to Protect Out Environment, 20 EDF COLUMN 1, ¶ 3 (last modified Mar. 24, 1999)
II. LOS ANGELES: A TEST MARKET FOR AIR POLLUTION TRADING The Los Angeles, California, region provides an ideal testing ground for environmental policies. Los Angeles’ environmental problems are severe, its regulatory agencies are sophisticated, its re- sources are relatively ample, and the region’s population is multi- racial and economically diverse. Los Angeles and the State of Cali- fornia continue to be national and international pacesetters for the development of new air pollution control policies and technologies. Thus, the effect of Los Angeles’ pollution trading programs on air quality, public health, and environmental justice will help inform the future of this market-based approach. The South Coast Air Basin,44 which includes the metropolitan Los Angeles area, suffers the worst air quality in the nation.45 For ex-
(1996); Fialka, supra note 16 (discussing President Clinton’s plan to expand pollution trading world-wide and the Environmental Defense Fund’s consulting with British Petroleum on a world wide carbon dioxide market). 41. See, e.g., U.S. ENVIRONMENTAL PROTECTION AGENCY, DRAFT FRAMEWORK FOR WATERSHED-BASED TRADING, EPA 800-R-96-001 (May 1996). 42.See, e.g., UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, COM- BATING GLOBAL WARMING: POSSIBLE RULES, REGULATIONS AND ADMINISTRATIVE
ARRANGEMENTS FOR A GLOBAL MARKET IN CO2 EMISSION ENTITLEMENTS (1994); UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, GREENHOUSE GAS EMISSIONS TRADING: DEFINING THE PRINCIPLES, MODALITIES, RULES AND GUIDELINES FOR VERI- FICATION, REPORTING AND ACCOUNTABILITY (1998). 43.See generally, Driesen, Cheap Fix?, supra note 8 (emissions trading is a cheap fix, not a free lunch or an enduring solution to pollution problems). 44. The South Coast Air Quality Management District (SCAQMD) was created to achieve and maintain healthful air quality in the South Coast Air Basin, a four-county region which includes Los Angeles and Orange counties and parts of Riverside and San Bernardino counties in California. This area of 12,000 square miles is home to more than 14 million peo- ple—almost half the population of the State of California. It is the second most populous urban Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 243 ample, nearly 6,000 premature deaths caused by particulate air pollu- tion occur in the Los Angeles area each year, representing about a tenth of such fatalities nationwide.46 Additionally, millions of resi- dents of the region are exposed to unhealthy levels of ground level ozone, which causes aching lungs, wheezing, coughing, headache and permanent lung tissue scarring.47 Levels of toxic chemicals in the air pose significant risks for causing cancer and other chronic diseases.48 area in the United States. See South Coast Air Quality Management District, Introducing AQMD (last modified Jan. 27, 1999)
This dangerous mix of air pollutants, which are emitted by multitudes of factories, cars, and other sources, seriously threatens public health and well being. A richly diverse, multi-racial and multi-ethnic population lives, works, and plays in the Los Angeles region,49 raising the environ- mental justice50 concern that people of color51 and poor people are un- fairly exposed to more air pollution than others.52 Therefore, air pollution reduction strategies, including pollution trading programs, should be evaluated not only for their efficacy in reducing air pollu- tion, but also for their effect on achieving environmental justice. Will such programs alleviate or worsen the environmental injustice of dis- proportionate exposures to air pollution already faced by the most powerless segments of society?53 The answer to this question is al-
49. Of the more than 9.6 million people who live in Los Angeles County, nearly four mil- lion are Latino, about 3.5 million are White, 1.1 million are Asian/Pacific Islander and about one million are African-American. See Los Angeles County, County of Los Angeles Statistical Data (last modified May 12, 1998)
A. Pollution Trading Comes of Age in Los Angeles: From Rule 1610 to RECLAIM and Beyond The development of pollution trading represents an important modern day chapter in the fifty-year-old political history of air pollu- tion regulation and reaction in Los Angeles.54 Industry and business interests in the Los Angeles area, which have generally opposed or resisted technology-based regulations, reacted strongly against the court-ordered 1989 Air Quality Management Plan (AQMP).55 Under intense political pressure compounded by an economic recession, the South Coast Air Quality Management District (SCAQMD) openly embraced industry’s call to replace existing and proposed air quality regulations with market incentive programs. The Clean Air Act Amendments of 199056 authorized states and local air districts to de- velop economic incentives programs, further paving the way for pol-
54. See South Coast Air Quality Management District, The Southland’s War on Smog: Fifty Years of Progress Toward Clean Air, Part 1 (last modified Mar. 4, 1997)
57. See Judy Pasternak, AQMD Approves Changes to Region’s Clean Air Plan; Pollution: Revision is criticized by environmentalists and small businesses and praised by trade associa- tions, L.A. TIMES, July 13, 1991, at A1; Polesetsky, supra note 45, at 362-65 (noting that the RFG included at various times Chevron, Unocal, Shell, Mobil, Texaco, ARCO, and several of the other largest polluters); Marla Cone, AQMD Plan for Blue Skies Turns Hazy, L.A. Times, Aug. 21, 1993, at B1 (reporting that the largest polluters—oil refineries, power utilities, and major aerospace firms—stand to gain from RECLAIM because they can save millions of dol- lars a year but that smaller, less-polluting businesses would lose money under RECLAIM). 58. As SCAQMD Executive Officer James Lents wrote to the SCAQMD Board of Direc- tors: [Rule 1610] provides an alternative strategy for reducing emissions at a potentially lower cost . . . [and] adverse impacts on compliance costs for regulated industries will not occur. Businesses affected by District stationary source regulations have shown increasing interest in having the option of implementing mobile source emission con- trol strategies to acquire emissions reduction credits. Proposed Rule 1610 addresses this interest. Letter from James Lents, Executive Officer, SCAQMD, to SCAQMD Board of Directors to the SCAQMD Board (Dec. 28, 1992) (urging certification of the Environmental Assessment for Rule 1610 and adoption of Rule 1610) (on file with author); see also Maria L. La Ganga, Firms Can Earn Pollution Credits by Buying Old Cars; Environment: AQMD approves ground- breaking plan to let companies delay costly smog-reduction efforts, L.A. TIMES, Jan. 9, 1993, at A1. 59.See Goldschein, supra note 13, at 254-55. Though each individual vehicle represents a miniscule portion of the pollution problem, mobile sources collectively represent a significant portion. See id. at 239. Furthermore, a small number of vehicles account for a disproportionate amount of motor vehicle emissions. See id. at 241. The vast majority of these dirty vehicles are older vehicles. See id. Because of minimal or nonexistant emission control equipment, deterio- ration, and poor maintenance, older vehicles can generate very high emission levels. See id. Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 247
Under Rule 1610, “licensed car scrappers” can purchase and de- stroy old cars.60 SCAQMD then grants the scrapper emissions credits based on the projected emissions of the car had it not been destroyed, which may then be sold to stationary source polluters (e.g. factories). The stationary sources use the pollution credits to avoid on-site emis- sion reductions that would be required under the technology-based regulatory regime. Rule 1610 requires polluters to purchase credits representing twenty percent more emission reductions than would be achieved through compliance with technology-based regulations for their plant. Although industrial plants avoid emission reductions, the scrapping of older, high polluting cars should result in greater air quality improvements at a lower cost than regulatory mandates. SCAQMD then adopted the centerpiece of its pollution trading strategy, the Regional Clean Air Incentives Market (RECLAIM), the world’s first urban smog trading program.61 RECLAIM replaced many of SCAQMD’s technology-based regulations aimed at reducing emissions of sulfur oxides (SOx) and nitrogen oxides (NOx). RECLAIM, a “declining cap and trade” program, mandates annual emission reductions for industry but provides them the flexibility to achieve that goal by either purchasing emission reduction credits or by reducing their own pollution. Under RECLAIM, SCAQMD allo- cates pollution credits to each major source facility62 in the region
60. South Coast Air Quality Management District, Regulation XVI - Mobile Source Offset Programs, Rule 1610(b)(6) (last modified Mar. 11, 1999)
62. The RECLAIM market includes all facilities that emit more than four tons of NOx or
SOx per year, except certain exempt public service facilities. See South Coast Air Quality Man- agement District, Regulation XX - Regional Clean Air Incentives Market (RECLAIM), Rule 2001(b) (last modified Apr. 15, 1998)
63. See SCAQMD, RECLAIM Rules, supra note 62, at Rule 2002(e)(1). 64. See Cone, supra note 61, at B1. 65. For example, the SCAQMD Annual Report for 1996 states, in 1996 [SCAQMD] continued its efforts to increase flexibility, streamline require- ments and reduce fees for businesses under [its] Regulatory Reform Initiatives. For example, [SCAQMD] adopted a novel and widely heralded measure to allow busi- nesses to help meet their air pollution reduction requirements by scrapping old lawn and gardening equipment, rather than employing costly new controls at their facilities. South Coast Air Quality Management District, South Coast Air Quality Management District 1996 Annual Report (last modified March 10, 1997)
Rule 1610 to provide for the issuance of Mobile Source Emission Re- duction Credits (MSERCs) for voluntary emission reductions from: • the repair of emissions-related components in high-emitting vehicles,68 • the purchase of clean on-road vehicles, including new, low- emission buses, retrofitting vehicles to low-emission configu- rations, and purchasing zero-emission vehicles,69 • the electrification of truck stops and tour bus stops to pre- vent engine idling,70 • the purchase of low or zero emission off-road vehicles,71 • the purchase of clean lawn and garden equipment, such as battery-operated lawn mowers and leaf blowers, and the scrapping of old equipment.72 Additionally, SCAQMD has proposed a broad Intercredit Trading Program that will radically expand the emissions trading market by linking all of SCAQMD’s stationary, mobile, and area source credit markets.73 To avoid reducing emissions from their em- ployees’ commutes, the Air Quality Investment Program allows large employers and other polluters to pay a fee to be used later to reduce other emissions.74 Final adoption in 1999 of the Intercredit Trading rule, the lynchpin of the Intercredit Trading program, is expected to address the critical issues of credit conversion between markets, credit life, and banking.75 With industry encouragement, SCAQMD
68. See SCAQMD, Offset Programs, supra note 60, at Rule 1605. 69. See id. at Rule 1612. 70. See id. at Rule 1613. 71. See id. at Rule 1620. 72. See id. at Rule 1623. See also Marla Cone, Lawn Mower Buyback Plan Approved; Smog: Policy will let firms purchase and scrap homeowners’ gas-powered equipment in exchange for pollution credits, L.A. TIMES, May 11, 1996, at A20. 73. See Bill Kelly, Intercredit Trading Market Proposed, 3 AQMD ADVISOR 4, 4-5 (March 1996); Howard Fine, AQMD Banking on Broader Smog Credit Plan, ORANGE CO. BUS. J., Feb. 12, 1996, at 3 (noting that the intercredit trading program would not result in any addi- tional emissions reductions, but rather make it easier for companies to reduce emissions under existing rules). 74. See SCAQMD, Intercredit Trading, supra note 66, at Rule 2501; South Coast Air Quality Management District, AQMD News - AQMD Approves Air Quality Investment Pro- gram, (last modified Feb. 23, 1999)
B. The Harsh Reality: Problems with Pollution Trading in Los Angeles Evidence indicates that pollution trading programs in Los An- geles are plagued with problems. Although the programs have suc- ceeded in saving money for industry, they have not effectively re- duced emissions and have not promoted technology innovation or public participation. Instead, they have further concentrated the re- gion’s pollution in lower income communities and given industry a “free ride” from otherwise obligatory emissions reduction schedules.
1. Toxic Hot-spots and Environmental Injustice: The Mad Science of Pollution Trading Pollution trading programs can unfairly concentrate pollution in communities where factories purchase emissions reduction credits rather than reduce actual emissions. These localized health risks from pollution sources, or “toxic hot-spots,” tend to be overlooked by policy makers focused on regional air quality concerns. However, the disproportionate burden thrust on communities surrounding ma- jor pollution emitters takes its toll in the form of increased risks of toxic exposure and damage to human health. Furthermore, it is envi- ronmentally unjust when these communities enduring localized toxic hot-spots are overwhelmingly low income and populated by people of color.83 Such hot-spots can be worsened when pollution trading pro- grams ignore the differences in chemical hazards posed by the pollut- ants reduced to earn credits and the pollutants emitted through the purchase of credits. The problem of hot-spots is further complicated by the emission of co-pollutants and precursors, which may increase exposure to certain types of chemicals in downwind communities where pollution is concentrated.
83. See Exec. Order No. 12898, 59 Fed. Reg. 7629 (1994) (federal policy requires that en- vironmental injustice be assessed and addressed). See discussion infra Part III.B. 252 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231
SCAQMD’s pollution trading programs have resulted in the creation of toxic hot-spots by concentrating pollution in communities surrounding major sources of pollution. Rule 1610 provides the clearest example. SCAQMD studies indicate that cars destroyed through the Rule 1610 program were registered throughout the air quality management district, a four-county region.84 Air pollution from these automobiles would have also been distributed throughout this region. By contrast, stationary sources in Los Angeles are densely clustered in only a few communities in this four-county re- gion.85 As a result of these distribution patterns, Rule 1610 effec- tively takes pollution formerly distributed throughout the region by automobiles, and concentrates that pollution in the communities sur- rounding stationary sources. Most of the emissions credits purchased to avoid stationary source controls have been purchased by four oil companies: Unocal, Chevron, Ultramar and GATX.86 Of these four companies, three are located close together in the communities of Wilmington and San Pedro; the fourth facility, Chevron, is located nearby in El Segundo. These companies have used pollution credits to avoid installing pollu- tion control equipment87 that captures toxic gases released during oil tanker loading at their marine terminals.88 When loading oil tankers, toxic gases are forced out of the tanker and into the air, exposing workers and nearby residents to toxic vapors, including benzene, a
84. See Declaration of Bruce Lohmann in Support of Complainants Opposition to Re- spondents’ Response to Environmental Justice Complaint at 22, Communities for a Better En- vironment v. South Coast Air Quality Management Dist., EPA File No.10 R-97-R9 (US EPA, Office of Civil Rights 1998) (“[T]he cars that were scrapped came from all over the South Coast Air Basin, a four-county area.”) [hereinafter Lohmann Declaration]; South Coast Air Quality Management District, Rule 1610/All Vehicles Scrapped (undated map) (on file with authors). 85. See discussion infra, Part IV.A. 86. See generally Letter from Richard Toshiyuki Drury et al., Communities for a Better Environment, to Anne Goode, U.S. Environmental Protection Agency (Nov. 23, 1998) (Re: CBE et al. v. SCAQMD et al., No. 10R-97-R9; CBE’s response to SCAQMD’s June 26, 1998 Brief in the Title VI Civil Rights Act complaint filed against the SCAQMD over the car scrap- ping program) (on file with authors). 87. The equipment is similar to the vapor control nozzles common at gasoline stations in many states, only much larger. 88. Vapor recovery during marine loading was required by SCAQMD, Rule 1142, which EPA approved for inclusion in the State Implementation Plan, making the requirement en- forceable under the federal Clean Air Act. See Approval and Promulgation of Implementation Plans; California State Implementation Plan Revision; San Diego County Air Pollution Control District; San Joaquin Valley Unified Air Pollution Control District; South Coast Air Quality Management District, 59 Fed. Reg. 64,132 (1994) (codified at 40 C.F.R. Part 52) (proposed Dec. 13, 1994). Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 253
89 known human carcinogen. Thus, by using pollution credits, these companies are allowed to avoid reducing local emissions of hazard- ous chemicals in exchange for reducing regional auto emissions. As a result of Rule 1610, the four oil companies created a toxic chemical hot-spot around their marine terminals, exposing workers and nearby residents to elevated health risks. Exposure to the emissions from loading marine vessels poses a cancer risk greater than 150 in 1 million for the maximum exposed individual.90 By comparison, the typical significant risk threshold for cancer risk ranges from one to one hundred in 1 million.91 Neither of these risk estimates considers the cumulative impact of marine ter- minal emissions in combination with all the other sources of toxic air contaminants to which people in the region are exposed.92 Rule 1610 allows automobile pollution, which was formerly dis- tributed widely across the four-county South Coast Air Basin, to be traded for highly concentrated “volatile organic compounds” (VOCs) that are released into the communities surrounding these marine terminals. In theory, air pollution was reduced by a slight amount throughout the Los Angeles region to offset this pollution hot-spot. However, now a few communities surrounding stationary sources bear the brunt of pollution exposures that were formerly shared by the entire region’s population.93
89.See Shipra Bansal & Scott Kuhn, Stopping an Unfair Trade: Environmental Justice, Pollution Trading, and Cumulative Impacts in Los Angeles, ENVTL. L. NEWS, Spring 1998, at 16, 17-18. A marine vapor recovery system can reduce VOC emissions by at least ninety-five percent during any loading, lightering, ballasting or housekeeping events. See id. at 20. 90. See Los Angeles County Building and Construction Trades Council and the Steamfit- ters and Pipefitters Local 250, Comments on the Draft Environmental Impact Report for the Renewal of Unocal’s Lease for Berths 148-151, in FINAL ENVIRONMENTAL IMPACT REPORT FOR BERTHS 148-151 PORT OF LOS ANGELES 17, 23 (1996). The Environmental Impact Re- port documented that workers at the marine terminal would be exposed to a total cancer risk of 162 in a million if that facility’s lease was renewed to allow four additional ships per month to unload. 91. The Clean Air Act establishes that if technology-based standards do not reduce life- time excess cancer risks to the individual most exposed to hazardous air emissions to less than one in one million, the EPA Administrator shall promulgate standards under this subsection for such source category, in order to protect human health and the environment. See 42 U.S.C. § 7412(f)(2)(A) (1994). The same risk level forms the basis for delisting hazardous air pollut- ants providing that the cancer risks from sources is less than one on a million. See 42 U.S.C. § 7412(c)(9)(b)(i) (1994). 92. The average “background” cancer risk from exposure to toxic chemicals in the air of Los Angeles is 426 in one million. See Getter, supra note 48, at A1. 93. Similar trading patterns have developed under RECLAIM. The region’s largest pol- luters, particularly refineries, have been the most active purchasers of RECLAIM emission reduction credits. See Douglas Young, Unocal Stocking up on Pollution Credit as Refinery Sell- 254 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231
To add insult to injury, the public health risks from the extra pollution concentrated in these neighborhoods constitutes a case of environmental injustice. The demographics of this hot-spot area starkly contrast with that of the metropolitan Los Angeles region. The residents living in San Pedro and Wilmington, which host a ma- jority of the oil companies emitting hazardous toxic chemicals, are overwhelmingly Latino. Furthermore, the racial composition of communities living near three of the marine terminals ranges from 75 to 90 percent people of color, while the entire South Coast Air Basin has a population of only 36 percent people of color.94 These communities are already overburdened with high levels of pollution.95 People of color bear a disproportionate share of the im- pacts of air pollution and other environmental hazards within the Ba- sin.96 A 1993 SCAQMD study found that “those who are relatively off Nears, L.A. Bus. J., Mar. 17, 1997, at 13 (noting that Unocal and Chevron were the top two purchasers of pollution credits in 1996. Three other refineries were among the top 10 purchas- ers: Mobil, Texaco, and Powerine Oil Company). 94. See Bansal & Kuhn, supra note 89, at 18. The South Coast Air Basin is home to 13,862,513 people. Of this number, 4,988,739 are people of color and 8,873,774 are white. See U.S. Census Bureau, Census Bureau Population topics and Household Economic Topics (visited Apr. 1, 1999)
97. SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT/CALIFORNIA STATE UNI- VERSITY FULLERTON FOUNDATION, supra note 95, at 5. 98. The study looked at manufacturing facilities required to report environmental releases of hazardous chemicals under the Toxic Release Inventory (TRI) program of the Emergency Planning and Community Right-to-Know Act (EPCRA). See 42 U.S.C. § 11001 (1994). 99. See generally LAURETTA M. BURKE, ENVIRONMENTAL EQUITY IN LOS ANGELES (1993) (National Center for Geographic Information and Analysis Technical Report 93-6). 100. See Joel Thomas Boer & Dr. James L. Sadd, In Whose Back Yard? The Demography of Populations Proximate to Hazardous Waste Facilities in Los Angeles County, ENVTL L. NEWS 10, 14 (1996). 101. See id. 102. The term “inter-pollutant trading” refers to the allowing of emissions of one pollutant to persist or increase in exchange for reducing emissions of a different pollutant somewhere else. In the discussion, supra, hot-spots resulted from allowing concentrated emissions in one location in exchange for widely dispersed emission reductions throughout the region. Through inter-pollutant trading, the continued (or increased) emissions of more hazardous pollutants could be justified by other reductions in less hazardous pollutants. 103. See SCAQMD, Offset Programs, supra note 60, at Rule 1610(a). 104. See Bansal & Kuhn, supra note 89, at 18; U.S. Environmental Protection Agency, Of- fice of Air Quality Planning & Standards, Speciation Profiles for Volatile Organic Compounds, USEPA SPECIATE software. 256 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231
VOC emissions from marine terminals compared to VOCs from automobiles. For example, benzene levels may be higher in VOC emissions from marine terminals than from cars,105 which leads to greater exposure and risks concentrated in the communities around the marine terminals. Benzene exposure can cause leukemia, ane- mia, respiratory tract irritation, dermatitis, pulmonary edema, and hemorrhaging.106 Therefore, the Rule 1610 program may allow con- tinued release of highly toxic chemicals into certain communities in exchange for small area-wide reductions in much less toxic chemicals. Yet, no source testing has been required by SCAQMD to accurately characterize the differences in chemical composition and toxicity among VOC emissions subject to trading. In addition to concerns about variable toxicity, VOCs also ex- hibit different degrees of reactivity related to their ability to form photochemical smog.107 These differences in photochemical reactivity have long been recognized in air pollution regulation and have guided priority setting in the control of VOC sources for smog con- trol.108 In pollution trading programs, however, if highly reactive
105. Using USEPA software called SPECIATE, Communities for a Better Environment’s staff scientist, Shipra Bansal downloaded the average chemical breakdowns for VOC emissions at petroleum product storage facilities (a surrogate for marine terminals) and for VOC emis- sions out of tailpipes. See Bansal & Kuhn, supra note 89, at 18. While benzene makes up to thirty-two percent of fugitive emissions at the marine terminals according to this model, it makes up less than two percent of tailpipe emissions. See id. at 19. Emissions from marine ter- minals have up to 16 times more benzene than automobile air emissions. See id. No source testing data are available to verify the content of benzene or other toxic chemicals in the ma- rine terminal VOC emissions. The same VOC profiles showed that twenty-two percent of the emissions by weight from marine terminals consisted of chemicals not found at all in tailpipe emissions. See id. 106. Benzene is listed as a “hazardous air pollutant” in the 1990 Clean Air Act and is on the California Proposition 65 list of cancer-causing chemicals. See J. HARTE, ET AL., TOXICS A TO Z 233-35 (1991); Bansal & Kuhn, supra note 89, at 19; SAFE DRINKING WATER AND TOXIC ENFORCEMENT ACT OF 1986 (PROPOSITION 65), CAL. HEALTH & SAFETY CODE § 25249.8 (West 1998). 107. Volatile organic compounds (VOCs) include reactive organic gases containing carbon that interact with nitrogen oxides (NOx) in the presence of sunlight to form photochemical smog, including ground level ozone for which state and federal health standards have been es- tablished. 108. See Recommended Policy on Control of Volatile Organic Compounds, 42 Fed. Reg. 35,314 (1977); Requirements for Preparation, Adoption and Submittal of Implementation Plans; Approval and Promulgation of Implementation Plans, 57 Fed. Reg. 3941 (1992) (codified at 40 C.F.R. Parts 51 and 52) (proposed Feb. 3, 1992) (re-defining VOC). See Air Quality: Revision to Definition of Volatile Organic Compounds--Exclusion of Acetone, 60 Fed. Reg. 31,635 (1995) (codified at 40 C.F.R. Part 51) (proposed June 16, 1995) (citing William P. L. Carter, Development of Ozone Reactivity Scales for Volatile Organic Compounds, J. AIR & WAST MGT. ASSOC. (1994). Table III of Carter’s paper gives a list of organic compounds Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 257
VOCs are emitted by purchasing credits earned for reducing low re- activity VOCs, then downwind ozone (smog) formation may be in- creased rather than reduced. This represents another inter-pollutant trading flaw in pollution trading programs that include VOCs. The complex chemistry of air pollution leads to further problems with pollution trading. Emissions are composed of complex mixtures of chemicals, not the single pollutants often targeted for regulation or trading. We use the term “co-pollutants” to describe the secondary pollutants that inextricably accompany the emission of primary tar- geted pollutants. Further, air pollutants can later undergo chemical changes into more hazardous pollutants downwind. The initially emitted chemicals are commonly referred to as “precursors” to the hazardous pollutants formed later.109 Since pollution trading enables polluters to avoid emission reductions, or even increase emissions, at one location by purchasing credits earned elsewhere, the co- pollutants associated with that emission source may also persist and concentrate around that polluter. Likewise, if emissions contain pre- cursors, then greater exposure to the pollutants formed later may oc- cur downwind when credits are purchased to maintain or increase emissions at a facility. The results of the Rule 1610 car scrapping program demonstrate the co-pollutant problem. The VOCs emitted from the oil refinery marine terminals were targeted for regulation because they are pre- cursors to ozone formation. In fact, many of the VOCs are also toxic co-pollutants. Unrestricted trading of VOCs inevitably results in lo- calized toxic hot-spots, where toxic VOCs exist at higher levels at some locations than would be allowed under a technology-based regulatory regime. The RECLAIM trading program presents a broader and less ex- amined case of the co-pollutant and precursor problem. RECLAIM allows industrial sources to separately trade two combustion byprod- 110 ucts, NOx and SOx. The trading program and the technology-based ranked by a maximum incremental reactivity (MIR) scale, with higher scores for VOCs that are more likely to react to form ground level ozone in smog.).
109. For example, ground level ozone forms as a result of precursor emissions of NOx and
VOCs from numerous sources in a broad geographic area. NOx and SOx are precursors to acid rain formation. Combustion gases can act as precursors to the formation of fine particles, or particulate matter, another serious air pollution problem.
110. NOx and SOx are emitted when fossil fuels are burned at a variety of industrial- commercial-institutional combustion sources and transportation-related sources. Hundreds of other co-pollutants are released during combustion of fossil fuels including fine particles, poly- cyclic aromatic hydrocarbons, mercury and other hazardous air pollutants and products of in- complete combustion. See U.S. ENVIRONMENTAL PROTECTION AGENCY, INDUSTRIAL 258 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231
rules it replaced targeted NOx as a precursor to ozone smog forma- tion. SOx was included because it is a precursor to the formation of fine particulate matter, which lodges deep in people’s lungs contrib- uting to premature mortality and breathing difficulties.111
Does the trading of NOx and SOx, which allows some major sources to avoid emissions reductions, result in persistent or in- creased exposures in some areas to hazardous co-pollutants or pre- cursors to hazardous pollutants, such as fine particles, ozone or for- maldehyde? The answer is “maybe.” There has been little analysis of whether concentrated hot-spots of ozone or other photochemical oxidants, e.g. formaldehyde, or increased exposure to fine particu- lates, have resulted from RECLAIM trading patterns.112 More re- search needs to be performed in this area, because the co-pollutant and precursor problems may be exacerbating the already unfair con- centration of the region’s pollution in a few communities.
2. Market Incentives Run Amok: Fraud and Manipulation Air pollution regulatory programs have been plagued with tech- nical uncertainties in accurately accounting for the amount of emis- sions from different sources.113 Such concerns exist for both a tech- nology-based approach and an emissions trading approach to regulation. However, for an emissions trading program, accuracy is more important than for technology-based regulations, because an accounting of pollution forms the basis for the number of emissions
COMBUSTION COORDINATED RULEMAKING: ORGANIZATIONAL STRUCTURE AND PROCESS 10 (1997). 111. See Selmi, supra note 55, at 10,697. 112. See SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT, RECLAIM PROGRAM THREE-YEAR AUDIT AND PROGRESS REPORT 104-13 (1998) [hereinafter SCAQMD, RECLAIM PROGRAM AUDIT]; Scott L. Johnson & David M. Pekelney, Economic assessment of the Regional Clean Air Incentives Market: a new emissions trading program for Los Angeles, 72 LAND ECONOMICS 277, 292 (1996) (reporting the methodology used to assess the potential economic and environmental impacts of the RECLAIM emissions trading programs). Johnson and Pekelney report that RECLAIM will result in “changes in geographic distribution [which] include peak ozone concentrations that are lower in the western and central areas of the Basin and higher in some areas of southern Los Angeles County and northern Orange County, com- pared to CAC [command-and-control] regulations.” See id. 113. See U.S. Environmental Protection Agency, Office of Air Quality Planning and Stan- dards, Clearinghouse for Inventories and Emissions Factors, COMPILATION OF AIR POL- LUTANT EMISSIONS FACTORS, AP-42, FIFTH EDITION, VOL. I: STATIONARY POINT AND AREA SOURCES 3-4 (1995) (last modified July 3, 1997)
114. See discussion infra Part III.C.4. There are inherent problems with monitoring and enforcement associated with pollution trading. In Los Angeles, noncompliance rates by indus- try are high for the pollution monitoring requirements of the RECLAIM trading program. 115. See U.S. EPA, AP-42, supra note 113, at 2. “Because emission factors essentially rep- resent an average of a range of emission rates, approximately half of the subject sources will have emission rates greater than the emission factor and the other half will have emission rates less than the factor. As such, a permit limit using an AP-42 emission factor would result in half of the sources being in noncompliance.” Id. 260 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 verify.116 They can readily be adjusted to report emissions as being higher or lower, since at best they represent educated guesses of ac- tual emissions.117 Source testing, which measures actual emissions, was required to ensure compliance with the technology-based emis- sion limits set under Rule 1142 for marine terminals.118 Information recently obtained through the Freedom of Informa- tion Act reveals that the oil companies did, in fact, measure their emissions. When the actual measurements were compared to re- ported emissions based on industry emissions factors, striking differ- ences were revealed. Oil companies under-reported their oil tanker emissions by factors between 10 and 1000.119 As a result, the oil com- panies purchased between 10 and 1000 times too few credits from scrapping old, high-polluting cars to offset their tanker pollution. This persistent problem was completely overlooked by SCAQMD and was only detected through a time-consuming investigation by Communities for a Better Environment.120 However, despite this un- der-reporting, SCAQMD continues to allow the use of emissions fac- tors to underestimate emissions. Exacerbating the huge gap between actual emissions and credits purchased by polluters, credit generators—the car scrappers—have abused the system. Many of the cars allegedly destroyed through the
116. See Letter from Jim Jenal, Richard Toshiyuki Drury & Alan Ramo, Communities for a Better Environment (CBE), to James M. Lents, Ph.D., Executive Officer, SCAQMD 4 (June 25, 1993) (CBE’S COMMENTS ON DRAFT RECLAIM RULES AND ENVIRONMENTAL AS- SESSMENT) (on file with authors). See also Selmi, supra note 55, at 10,705. 117.Cf. Letter from Jim Jenal, Richard Toshiyuki Drury & Alan Ramo to James M. Lents, supra note 116, at 4. In the South Coast Air Basin, approximately eighty percent of sources are in AP-42 categories E and F, meaning that their emissions factors have the lowest level of accu- racy. See id. at 4 (citing to EPA’s COMPILATION OF AIR POLLUTANT EMISSIONS FACTORS, AP-42, (4th ed.)). 118.See Letter from Wang, Mgr., Oper. & Envtl. Issues, Western States Petroleum Asso- ciation, to Jim Lents, Exec. Officer, SCAQMD 3 (April 27, 1994) (source testing needed to en- sure compliance with Rule 1142 limits) (on file with authors). 119. See Letter from Richard Toshiyuki Drury et al., to Anne Goode, supra note 86 (citing UNOCAL, VAPOR SOURCES: PERMIT APPLICATION SECTION 5 (Mar. 25, 1992) which contains data supporting a permit to install a vapor reduction system at the Wilmington Marine Termi- nal). The actual, measured emission rates in Unocal’s Vapor Sources are significantly higher, from 12 to 1247 times higher, than what Unocal reported to SCAQMD on its Rule 1142/1610 compliance forms. Adding together all of Unocal’s under-reported and unreported marine loading emissions from 245 loading events from January 12, 1995 through March 31, 1998, re- veals that Unocal purchased 3 million fewer pounds worth of Mobile Source Emission Reduc- tion Credits than required. 120. Communities for a Better Environment (CBE) is a non-governmental organization that works with people affected by industrial pollution to improve environmental health and achieve environmental justice. The authors are current and former employees of CBE. Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 261
Rule 1610 program were not, in fact, destroyed, according to Bruce Lohmann, SCAQMD’s Chief Inspector for the Rule 1610 program.121 While the car bodies were crushed, many of the engines which pro- duce the pollution were not. Instead, many of those engines were sold for re-use, despite the fact that pollution credits for destroying the car had been granted by SCAQMD.122 EPA has refused to ap- prove the Rule 1610 program precisely because car engines are not always destroyed.123 Several assumptions underlying the Rule 1610 program are also dubious. In order to quantify the credits generated by scrapping a vehicle, SCAQMD assumes that the old cars would have been driven approximately 4,000 to 5,000 miles annually for an additional three years and that the owner of the car would replace it with a “fleet av- erage” automobile.124 Although these assumptions were based on studies of old car driving patterns, they have not been borne out in reality.125 According to Inspector Lohmann and an audit conducted by SCAQMD, many of the cars scrapped through the Rule 1610 pro- gram were at the end of their useful life, and would have been de- stroyed through natural attrition.126 Each year, between 100,000 to 200,000 old vehicles are naturally scrapped or abandoned without the intervention of the Rule 1610 trading programs.127 No “surplus”
121. See Lohmann Declaration, supra note 84, at 11-12.; Declaration of Bruce Lohmann in Support of Plaintiffs’ Motion for Preliminary Injunction at 11-12, Communities for a Better Environment v. Chevron Corp. (1998) (on file with authors). 122. See Lohmann Declaration, supra note 84, at 11. 123. See Letters from David P. Howekamp, Director, Air Division, EPA Region 9, to Barry Wallerstein, Acting Executive Officer, SCAQMD (June 23, 1998) (Aug. 12, 1998) (on file with authors). 124. See Lohmann Declaration, supra note 84, at 2-3; SCAQMD, Offset Programs, supra note 60, at Rule 1610(i). 125. See Lohmann Declaration, supra note 84, at 2, 21. 126. See id. at 5-6, 10. See also South Coast Air Quality Management District, Board Meet- ing Date: June 12, 1998 Agenda No. 4 (citing SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT, ATTACHMENT C: RULE 1610 OLD VEHICLE SCRAPPING SURVEY REPORT (March 1998)) (last modified June 26, 1998)
3. Distortion of the Market: Hot Air and Phantom Reductions In addition to fraud by market participants, “cap and trade” strategies, like Los Angeles’ RECLAIM program, are plagued by a broader form of institutional manipulation. This manipulation takes the form of ‘phantom reductions’ in air emissions — reductions that exist on paper only. Under RECLAIM, allowable emissions have declined each year as required by regulation.134 However, because emissions reduction credits were initially allocated in an amount sig- nificantly inflated above actual emissions,135 early ‘reductions’ in
132. See ROBERT KUTTNER, EVERYTHING FOR SALE: THE VIRTUES AND LIMITS OF MARKETS 49 (1997) (“Market values, ripped out of a broader context of socially shared norms, declare that opportunism, cutting corners, taking advantage are not only legitimate but virtu- ous, since squeezing out the maximum possible price that the market will bear maximizes effi- ciency.”). 133. See U.S. Securities and Exchange Comission, The U.S. Securities and Exchange Com- mission: What It Is, and What It Does, (last modified Dec. 23, 1996)
RECLAIM adoption, the aggregate rate of reduction of NOx emissions between 1994 and 2000 was established at eleven percent per year. See Selmi, supra note 55, at 10,701. 137. See Driesen, Cheap Fix?, supra note 8, at 60, n.328 (citing CHRIS ROLFE, TURNING DOWN THE HEAT: EMISSIONS TRADING AND CANADIAN IMPLEMENTATION OF THE KYOTO PROTOCOL 311 (1998)). Another California smog trading program, named “SEED,” is also based on hot air emissions. Under SEED, the Sacramento Metropolitan Air Quality Manage- ment District (SMAQMD) issued pollution credits that were generated by the decommission- ing of B-52 bombers that formerly flew out of the region. The SMAQMD issued five tons per year of VOC credits, representing the pollution that used to be released by the bombers. Those credits have been purchased by companies including Intel, Campbell’s Soup, Aerojet, and others, which have used to credits to avoid installing pollution control equipment. How- ever, the credits are pure “hot air.” Destruction of the bombers was required under the START treaty. Therefore, their pollution would have been eliminated in any case. As a result of the SEED program, the B-52 pollution continues despite the fact that the bombers are gone. In essence, they continue to pollute from the grave. See Letter from Richard Drury et al., Communities for a Better Environment, to Carol Browner, U.S. Environmental Protection Agency (June 12, 1998) (Re: Request that EPA Reject SMAQMD Rules 107, 204, and 205 (the SEED Program)) (citing Chris Bowman, Mather’s B-52 Loss May Help Clean Air, SAC- RAMENTO BEE, Sep. 1, 1996, at B1) (on file with authors). 138. See Selmi, supra note 55, at 10,699. The baseline allocation of pollution credits was further inflated as a result of two other provisions of RECLAIM adopted at industry’s insis- tence. One allows industry to add emission reduction credits previously earned under the lim- ited program in effect before RECLAIM to be added to their baseline allocation. The other provision, in a give away to the oil industry, allowed oil refiners to increase their baseline emis- sions allocation to reflect the increased refinery pollution associated with reformulated fuels production. Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 265
tons of NOx and SOx credits more than it should have issued based on actual emissions.139 This over-allocation of credits is a major reason for RECLAIM’s poor performance in reducing pollution.140 The RECLAIM trading program has achieved a slower rate of pollution reduction than would have been achieved by the former technology- based regulations. For example, the current RECLAIM allocations for NOx are projected to be greater in most years of the program than the comparative allocations from the 1991 Air Quality Management Plan (AQMP) that RECLAIM replaced.141 The RECLAIM alloca- tions for NOx are also greater than the NOx allocations in the 1994 AQMP, which is the approved State Implementation Plan142 for air pollution control in Los Angeles.143 According to a SCAQMD audit, over the first three years, RECLAIM has produced barely discernible pollution reductions.144
In fact, during the first two years of RECLAIM, 1994 and 1995, NOx 145 and SOx emissions reportedly increased compared to 1993. Only in 1996 were emissions reduced, and then by at most three percent from 146 1993 NOx levels and by less than ten percent from 1993 SOx levels. This pattern contrasts sharply with the time period 1989-1993 when
NOx emissions from industrial facilities declined steeply, by approxi- mately thirty-seven percent, as a result of technology-based control regulations.147 Due to the over-allocation of RECLAIM trading credits, credit prices are far below the level projected upon adoption.148 The logic of
139. See Letter from Jenal, Drury and Ramo to Lents, supra note 116 (citing an excess of
43,000 tons of NOx and SOx to be emitted over a ten-year period under RECLAIM compared to the emissions projected under the Air Quality Management Plan that it replaced). 140. See SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 247 (RECLAIM Advisory Committee members Gail Ruderman Feuer, Natural Resources Defense Council and Tim Carmichael, Coalition for Clean Air, in April 16, 1998 letter appended to RECLAIM pro- gram report and audit). 141. Id. at 29, 245-246. 142. A State Implementation Plan (SIP) details how compliance with the National Ambient Air Quality Standards will be achieved in each air quality control region (AQCR). To develop a SIP, each state first has to determine existing and projected levels of the criteria air pollutant in each AQCR within the state’s baoundaries. See PERCIVAL ET AL., supra note 14, at 792-93. 143. See SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 29, 245-46. 144. See Steven Church, Report Gives Smog-Trading Program an F Grade, SAN BER- NADINO COUNTY SUN, May 8, 1998, at B1; SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at id. at 42, 247, 252. 145. See SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 38. 146. See id. 147. See id. at 42, 247.
148. See id. at 53, 63. For example, in 1997, average prices for NO x credits ranged from 266 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 supply and demand explains these low credit prices. By flooding the market with tens of thousands of surplus credits, SCAQMD made the commodity nearly worthless. In an ideal world with perfect informa- tion, economists’ predictions concerning pollution reduction and technology innovation149 under a trading regime might bear fruit. However, because credit prices are so low due to this institutional de- fect in the market, industry has more motivation to purchase cheap credits than to invest in actual emission reductions or to develop in- novative pollution control technologies. With the supply of RECLAIM credits so far in excess of de- mand, more than eighty-five percent of the NOx credits traded (in tons) were sold for $0.150 Therefore, no rational company would re- duce emissions when other facilities are giving credits away for free. In fact, a company would be at a competitive disadvantage if it did invest in pollution control in such a market. SCAQMD ignored basic economic relationships between supply and demand and prices151 in the face of industry’s threats to abandon support for the proposed RECLAIM program.152 Industry lobbyists claim that a slow-down in pollution clean-up, resulting from an initial over-allocation of credits, is the necessary price to obtain industry acceptance of emission limits on their factories.153 This is a weak justification for RECLAIM’s poor performance in reducing air pollution thus far. Unfortunately, the
$227 per ton for current year credits to $1,880 per ton for year 2010 credits. See id. at 53. How- ever, a 1993 analysis, on the eve of RECLAIM adoption, projected that 1997 NOx credits would sell for $9,151 per ton while year 1999 NOx credits would command $11,257 per ton. See id. at 63. 149. See infra Part III.C. 150. See SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 55-57. A lot of these transactions involved transfers from facilities to third-party brokers and then transfers back again to the facilities when the brokers were unable to sell the credits for a price. More than 400 trades have been recorded in which RECLAIM Trading Credits were actually sold for a real price in the first three years of the RECLAIM program. 151. See Ackerman & Stewart, Reforming Environmental Law (I), supra note 10, at 1349. 152.See Marla Cone, Anti-Smog Plan Praised, Jeered as Hearings Begin; Environment: Hours of Testimony Reveal Bitter Divisions over Pollution-Trading Concept. Stakes are High for Air Quality and the State’s Economy, L. A. Times, Sept. 10, 1993, at A3. 153. C.W. Aarni, Chevron Products Company, justifies RECLAIM’s poor environmental performance by stating that: In order to implement RECLAIM, the emphasis of the District’s enforcement pro-
grams needed to shift from focusing on the concentration of NOx and SOx emitted to focusing on the total pounds of air contaminants emitted. For the first time, under RECLAIM, the mass of air contaminant emissions from industrial facilities is limited. This is good for air quality because it creates a level of certainty regarding future emissions. It was, however, a major adjustment for the business community. This “shift in consciousness” needed to occur during the first few years of RECLAIM. The slight over-allocations in the first few years were necessary to allow the shift to occur. SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 242. Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 267 international community is seemingly poised to make this same mis- take. Originally, SCAQMD pledged that credit supply would exceed demand for less than three years and that credit prices would rise steadily, motivating significant investments in pollution control. Now the air district says that the crossover point, where supply begins to fall below demand level, won’t be reached for NOx until at least 1999 and for SOx until at least 2001, six and eight years, respectively, after the program was started.154 If this currently closed market becomes open to credits earned from mobile and area source reductions, as proposed,155 RECLAIM credit prices will remain depressed for many more years to come. Not only were the RECLAIM trading credits over-allocated, they were given away, or grandfathered.156 In contrast, to internalize the costs of air pollution and to create proper price signals, many economists have called for an auctioning off of pollution credits to the highest bidder.157 The fees paid for emission credits would func- tion like pollution taxes to encourage further emission reductions thereby saving money.158 Revenues could be used to fund monitoring and enforcement of market trading rules and to compensate workers and consumers who are adversely effected by the pass-through costs of pollution permits.159 By giving away a public resource, pollution- free air, for free rather than charging the highest price the market
154. See id. at 36, 247. 155. See supra Part II.A. on the Intercredit Trading proposal. 156. See Selmi, supra note 55, at 10,698. 157. See Ackerman & Stewart, Reforming Environmental Law (I), supra note 10, at 1343-46 (objecting to two features of technology-based regulation, that existing permits are free, and they are non-transferable). In calling for marketable permits to be auctioned by the govern- ment, Ackerman and Stewart note that their “market reform will be opposed by businesses who (despite their promarket rhetoric) will predictably resist the prospects of buying pollution rights after all these years of polluting for free. . . . See id. at 1344, n.27. “While it is possible to design efficient auction systems that ameliorate, or eliminate entirely, the financial burdens imposed upon polluters”, Ackerman and Stewart would “oppose these schemes on principle.” See id. They “believe that just as firms are obliged to pay for other raw materials they require for their production process, they should be obliged to pay for the air and water degrade.” See id. 158. See M. JEFF HAMOND ET AL., TAX WASTE, NOT WORK 68 (1997) (holding that auc- tioning pollution permits and using the revenue to offset existing tax distortions would be pref- erable to other approaches). 159. See J. ANDREW HOERNER, ALTERNATIVE APPROACHES TO OFFSETTING THE COMPETITIVE BURDEN OF A CARBON/ENERGY TAX 28-29 (1997) (A grandfathered permit system would place U.S. competitiveness at greater hazard than an auctioned permit system or equivalent pollution tax because no new revenues would be generated to offset adverse eco- nomic impacts on workers, consumers and businesses) (on file with authors). 268 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 will bear, SCAQMD has subsidized industrial pollution and missed an important opportunity to harness market forces for environmental improvement.160 Since its inception, the Los Angeles emissions trading experi- ment has been wracked by fraud, manipulation, and subsidization of the worst polluters. Polluters have consistently under-reported their actual emissions by the use of emissions factors. Car-scrappers have re-used the engines from ‘scrapped’ vehicles and have issued credits for destroying inoperable cars, leading to a systematic over-reporting of pollution reduction in the Rule 1610 program. Finally, SCAQMD’s program has flooded the market with emissions credits by allocating pollution ‘rights’ based on a polluter’s highest historic emissions level, depressing the market price of credits and removing the incentive for innovation. Instead of listening to market theorists, RECLAIM trading credits were given away rather than auctioned. RECLAIM has every indication of amounting to at least a ten-year free ride of avoided emission reductions for the four hundred largest polluters in the Los Angeles area.161
III. THE TROUBLE WITH TRADING Some advocates and academics advance several arguments as they push to expand reliance on pollution trading and supplant tech- nology-based controls. According to trading proponents, emissions trading will provide equal or greater emissions reductions than a technology-based regulatory regime at a much lower cost to industry. They argue that emissions trading stimulates continuous technologi- cal innovation to reduce emissions. Furthermore, some contend that
160. SCAQMD does impose small fees on emissions to help fund its regulatory program, but they are not set at high enough levels to change price signals to promote significant pollu- tion reductions. SCAQMD has adopted a fee schedule for the issuance of air quality permits to stationary sources. RECLAIM facilities are required to file Annual Emissions Reports and pay annual fees based on their emission of air contaminants. The fees help cover costs to evaluate, plan, inspect, and monitor air quality efforts. See South Coast Air Quality Manage- ment District, Regulation III - Fees, Rule 301(o) (last modified July 1, 1998)
162. In 1996, industry actively opposed expansion of RECLAIM to 1,000 more industrial facilities that emit VOCs because of concerns that significant industrial emissions reductions would be required, which would limit economic growth in the region. The South Coast Air Quality Management District abandoned its proposal for RECLAIM VOC trading, instead opting to expand open market trading of mobile and area source credits, which allow industry to avoid reducing its own emissions. See South Coast Air Quality Management District, AQMD News - New Trading System Eyed: Air Board Shelves Expansion of Smog Trading Market (last modified Feb. 23, 1999) < http://www.aqmd.gov/news1/Archives/vocr.html>; Marla Cone, Anti-Smog Plan Appears Likely to Be Shelved, L.A. TIMES, Jan. 12, 1996, at A1. 270 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 perhaps the largest and most sophisticated air pollution regulatory institution in the world. These difficulties came from the oldest trading programs ever developed for urban air pollution, but they are not unique to pollution trading in Los Angeles. Rather, similar con- cerns and variations on the problems encountered in Los Angeles are likely to be experienced in any market incentives program that relies on trading in emission reduction credits.
A. Morality and the ‘Right’ to Pollute Although it appears to have become socially unacceptable to discuss the morality of public policy, this poses an important obstacle for pollution trading. Pollution trading removes the social stigma as- sociated with pollution. Rather than treating pollution as a social ill that we should attempt to eliminate to the extent feasible, trading programs turn pollution into another commodity, to be traded when economically efficiency dictates. What is wrong with polluting, when only money for the required pollution credits stands between socially acceptable behavior and socially aberrant activity? As Sandel points out, in a trading scheme, pollution becomes a right rather than a wrong: If a company . . . is fined for spewing excessive pollutants into the air, the community conveys its judgment that the polluter has done something wrong. A fee, on the other hand, makes pollution just another cost of doing business, like wages, benefits, and rent . . . . The distinction between a fine and a fee for despoiling the envi- ronment is not one we should give up too easily. Suppose there were a $100 fine for throwing a beer can in to the Grand Canyon, and a wealthy hiker decided to pay $100 for the convenience. Would there be nothing wrong in his treating the fine as if it were simply an expensive dumping charge?163 A more elegant, if not romantic, sentiment about pollution trading can be found in the words inspired by Chief Seattle nearly 150 years ago: What is it that the white man wishes to buy, my people ask me? The idea is strange to us. How can you buy or sell the sky, the warmth of the land, the swiftness of antelope? How can we sell these things to you and how can you buy them? . . . If we do not
163. See Michael Sandel, It’s Immoral to Buy the Right to Pollute, N.Y. TIMES, Dec. 15, 1997, at A2. Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 271
own the freshness of the air and the sparkle of the water, how can you buy them from us?164 Ultimately, no regulatory program can survive if it does not gen- erate morally acceptable outcomes. Economic efficiency alone does not create a sound basis for public policy if it results in immoral re- sults such as toxic hot-spots in disempowered communities, fraudu- lent emission reductions, or actual increases in pollution. As domes- tic environmental agencies and the international community consider expanding pollution trading to combat regional pollution and global climate change, the social and moral costs should be fully weighed, not just the economic benefits.
B. Environmental Injustice Regardless of one’s views on pollution rights and wrongs, distri- butional fairness, which lies at the heart of environmental justice concerns, cannot easily be ignored.165 As opposed to a technology- based regulatory strategy, pollution trading has higher public health risks because it concentrates pollution in neighborhoods surrounding polluters. These neighborhoods tend to be low-income communities of color. Environmental injustice results when regional pollution trading leads to disproportionate localized toxic exposures and risks to low income communities, a majority of which are ethnic and racial minorities.166 Although the movement for environmental justice and against environmental racism was self-named as recently as the 1980s, rela- tively powerless groups—immigrants, workers, women, poor peo- ple—have had a long tradition of organizing to redress hazardous living and working conditions in search of a cleaner, safer environ- ment.167 The modern day environmental justice movement challenges environmental policy makers and practitioners by emphasizing the public health and human rights dimensions of environmental prob-
164. FRED PARRY, HOW CAN ONE SELL THE AIR? CHIEF SEATTLE’S VISION 48 (1992) (inspired by Chief Seattle’s speech in December 1854 to Isaac I. Stevens, the new Governor and Commissioner of Indian Affairs for the Washington Territories who was on a preliminary field trip to the various tribes he was planning to force onto reservations). 165. See generally Richard J. Lazarus, Fairness in Environmental Law, 27 ENVTL. L. 705, 711 (1997) (fairness should be the basis used in assessing proposed reforms affecting existing environmental law). 166. See Exec. Order No. 12898, supra note 83. 167. See GOTTLIEB, supra note 24, at 235 (by the early 1900’s ethnicity has emerged as a significant though understated factor in how serious community and workplace environmental hazards were experienced). 272 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 lems and by demanding solutions which honor principles of social and economic justice.168 The organized linkage of environmental pro- tection with civil rights led to formal recognition by the Clinton ad- ministration and EPA that addressing environmental justice was a political imperative.169 The contested policy terrain of environmental justice features tools that advance environmental justice, such as en- forcement of Title VI of the Civil Rights Act against discriminatory environmental decisions,170 and tools that weaken environmental jus- tice protections, such as pollution trading. The Los Angeles experiment shows that emissions trading pro- grams can exchange small reductions in widespread pollution for in- creased exposure to concentrated, and often more toxic, pollution in the neighborhoods surrounding large industrial facilities.171 The re- sulting exposures to low-income communities of color make this a matter of environmental injustice. The Los Angeles experience demonstrates how two Clinton Administration priorities are in direct conflict—the promotion of en- vironmental justice and the promotion of pollution trading. The con- cerns documented in Los Angeles test the Administration’s commit- ment to environmental justice and its willingness to curb the excesses of unrestricted pollution trading. Over the last three years, the Na- tional Environmental Justice Advisory Council (NEJAC),172 ap- pointed by Administrator Carol Browner to advise EPA on environ- mental justice matters, has adopted a series of resolutions raising concerns related to pollution trading.173 An administrative complaint
168. At a seminal meeting of more than 600 environmental justice leaders, seventeen “Principles of Environmental Justice” were adopted at the First National People of Color Envi- ronmental Leadership Summit, held in Washington, D.C., in October 1991. See generally Karl Grossman, The People of Color Environmental Summit, in UNEQUAL PROTECTION: EN- VIRONMENTAL JUSTICE & COMMUNITIES OF COLOR 272, 272-97(Robert D. Bullard ed., 1994). 169. See Exec. Order No. 12898, supra note 83; National Environmental Justice Advisory Council, Welcome to the National Environmental Justice Advisory Council! (last modified Nov. 18, 1998)
ment (Mar. 11, 1998) (citing, for example, a resolution entitled Enforcement Resolution on [sic] Concerning Study of Disproportionate Impacts of Pollution Trading Programs, which was adopted by the National Environmental Justice Advisory Council (NEJAC) on Dec. 12, 1996) (on file with authors). 174. See Bansal & Kuhn, supra note 89, at 18. Communities for a Better Environment, working with NAACP Legal Defense Fund and the Center on Race, Poverty and the Environ- ment, filed the administrative complaint. EPA’s Title VI implementing regulations forbid it or its delegated agencies from taking actions that have “the effect of subjecting individuals to dis- crimination because of their race, color, national origin, or sex, or have the effect of defeating or substantially impairing accomplishment of the objectives of the program with respect to indi- viduals of a particular race, color, national origin, or sex.” 40 C.F.R § 7.35(b) (1998) (emphasis added). 175. See Perciaseppe, supra note 82. 176. See id. 177.See Eileen Gauna, Federal Environmental Citizen Provisions: Obstacles and Incentives on the Road to Environmental Justice, 22 ECOLOGY L.Q. 1, 27 (1995) (“The environmental jus- tice movement adheres to a social justice perspective of environmentalism, while EPA and many national environmental organizations adhere to a science and technology oriented per- spective of environmentalism. A scientific framework of risk analysis . . . is ill suited to address social justice issues.”). 274 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231
C. Pollution Trading: Many Promises, Poor Results Although trading advocates have made few, if any, direct claims related to environmental justice,178 they loudly assert emissions trad- ing will reduce pollution, even perhaps better than dreaded command and control regulations, and certainly at lower cost.179 Emissions trading has not effectively reduced pollution and has stifled innova- tion in new pollution control technology. Some critics argue that emissions trading does not ensure meaningful citizen participation or democratic decision making.180 Furthermore, others have defended the technology-based control strategy for its success in preventing pollution181 and for its superiority to unproven regulatory reforms ad- vanced in the name of efficiency.182 The technology-based approach also tends to avoid monitoring troubles that plague the emissions trading approach.
1. Pollution Trading Does Not Reduce Pollution Effectively Pollution trading programs are not effective policy tools for re- ducing air pollution, as seen in the results from the Los Angeles ex- periment.183 Neither RECLAIM nor the car scrapping trading mar- kets have significantly reduced air pollution, despite claims made to the contrary upon their adoption.
Before RECLAIM was adopted, emissions of NOx from indus- trial polluters dropped by about thirty-seven percent from 1989 to
178. See Ackerman & Stewart, Reforming Environmental Law (I), supra note 10, at 1350-51 (conceding that their proposed marketable permits system could allow the creation of relatively high concentrations of particular pollutants in small areas within the larger pollution control regions, i.e. “hot-spots”). While silent on the environmental justice implications of toxic hot- spots, Ackerman and Stewart contend that tolerating hot-spots is also a defect of best available technology regulations. See id. Nonetheless, the blindness of both systems to intraregional variation is a serious concern, according to Ackerman and Stewart, “deserving of the highest priority on the reform agenda.” See id. at 1350-51, n.43. 179. See generally Ackerman & Stewart, Reforming Environmental Law (II), supra note 11; Dudek and Palmisano, supra note 18. 180. See Heinzerling, supra note 9, at 343. 181.See Barry Commoner, A Reporter at Large: The Environment, THE NEW YORKER, June 15, 1987, at 46, 46-52 (reporting major progress when environmental regulations have re- quired prevention of pollution at its source, as opposed to control of pollution after its genera- tion). 182.See Howard Latin, Ideal Versus Real Regulatory Efficiency: Implementation of Uni- form Standards and “Fine-Tuning” Regulatory Reforms, 37 STAN. L. REV. 1267, 1270-71 (1985) (questioning whether other regulatory approaches would really perform better in practice that uniform standards). 183. See discussion infra Part II.B.2.-3. Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 275
1993 as a result of technology-based regulations.184 However, from 1994 to 1996, the first three years of pollution trading, RECLAIM fa- cilities had reported no more than a three percent reduction in NOx emissions in aggregate from 1993 levels,185 compared to an initially projected thirty percent aggregate reduction over the same time pe- riod.186 It may be several years more before industrial emissions are reduced further under RECLAIM.187 Foreshadowing the future of VOC trading and inter-source trading, the car scrapping program has reduced far fewer emissions than claimed, if any at all.188 Other pollution trading programs are likely to be plagued by similar poor environmental performance. Allocating emission credits so that they exceed actual air pollution levels makes the inflated baseline an attractive design criterion for policymakers under pres- sure from industry to cut environmental costs.189 Therefore, low credit prices and phantom reductions are certain. The increased in- centive to manipulate the numbers and engage in outright fraud will further dampen environmental performance.
2. Innovation Suffers Under a Pollution Trading Regime Understanding whether pollution trading has a positive or nega- tive effect on technology innovation remains a critical point of con- tention.190 Solving chronic threats to environmental health and cli- mate stability requires the development of innovative technologies.191
184. See SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 42, 247.
185. See id. at 38, 42. (reported NOx emissions from 1989 to 1996).
186. See Selmi, supra note 55, at 10,701 (the aggregate rate of NOx reduction for all RECLAIM sources will be about eleven percent per year). 187. See supra text accompanying note 161. 188. See Lohmann Declaration, supra note 121, at 26; SCAQMD, Board Meeting June 12, 1998, supra note 126, at Attachment D. 189.See supra text accompanying note 153; SCAQMD, RECLAIM PROGRAM AUDIT, su- pra note 112, at 242 (the overallocations in RECLAIM in the first few years were necessary to allow industry to adjust to and accept the concept of mass emission caps); Driesen, Cheap Fix?, supra note 8, at 64-66 (government officials eager to avoid accountability may treat emissions trading as an opportunity to avoid making specific decisions about where reductions will come from); Dudek & Palmisano, supra note 18, at 239-40 (paper trading, which refers to trading emission credits that never existed or that reflect reductions that would have happened anyway, has occurred but reforms can fix this abuse). 190. See, e.g., Ackerman & Stewart, Reforming Environmental Law (I), supra note 10, at 1346 (trading promises to reward innovative improvements in existing cleanup technologies); Driesen, Emissions Trading, supra note 6, at 334 (emissions trading discourages up front in- vestment in innovation necessary to develop new technologies with some initial costs). 191. See Lester R. Brown & Jennifer Mitchell, Building a New Economy, in STATE OF THE WORLD 1998, at 168-87 (1998); BARRY COMMONER, MAKING PEACE WITH THE PLANET 79- 102 (1990). 276 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231
Continuous improvement in clean production methods can signifi- cantly reduce pollution from industry, consumers, transportation, and the energy sector.192 Some academics argue that pollution trading encourages compa- nies to reduce pollution beyond the minimum required in order to earn emissions reduction credits which can be sold at a profit.193 This will encourage some companies to innovate for self-gain. Further- more, since pollution trading programs give companies the flexibility to meet reduction goals by any means, creative forces will be un- leashed to develop innovative and cost-effective ways to comply.194 Together, the combined attributes of profit motive and regulatory flexibility inherent in emissions trading programs will promote the development of new pollution reduction technologies more quickly than rigid mandates.195 In contrast, others have defended technology-forcing regula- tions, which set a performance standard achievable by the best avail- able control technology, citing its history of success in reducing pollu- tion.196 In response to such firm command and control mandates, industry has often innovated to meet and exceed the required emis- sion reductions.197 Driesen argues that pollution trading will actually stifle innova- tion by encouraging pursuit of cheap fixes rather than innovative and
192. The United Nations Environment Program has defined cleaner production as: Cleaner production is the continuous application of an integrated preventive envi- ronmental strategy applied to processes, products, and services to increase eco- efficiency and reduce risks to humans and the environment. . . . Cleaner production requires changing attitudes, responsible environmental management and evaluat- ing technology options. . . . The goal of cleaner production is to avoid generating pollution in the first place—which frequently cuts costs, reduces risks and identifies new opportunities. United Nations Environment Programme, Industry and Environment Office, A Definition For Cleaner Production (last modified Apr. 3, 1998)
That is more than fifty times the average price of current 1997 NOx credits under RECLAIM’s emissions trading program.203 Rather than innovate, many large and some small firms have chosen to purchase cheap credits. The Rule 1610 car scrapping program has taken less than 23,000 old cars off the road.204 However, this has allowed industrial firms that claimed car scrapping credits to avoid using existing or innova- tive technology to reduce their emissions. Also, scrapping old cars has not enhanced the market for new automotive technology. Many of these cars were at or near the end of their normal life span anyway, and the $600 payment for each scrapped car does not provide a seri- ous incentive for a consumer to purchase an electric vehicle or even a new, cleaner burning car.205 Therefore, in Los Angeles, pollution trading programs have stifled new technology development by al-
198. See generally Driesen, Cheap Fix?, supra note 8 (trading discourages capital invest- ment in technology innovation). 199. See id. at 42-43 (industry operators, who might have innovated to escape expensive pollution control regulations, will tend to purchase emission credits instead). 200. See Ackerman & Stewart, Reforming Environmental Law (I), supra note 10, at 1341 (Pollution trading creates a powerful financial incentive for those who can clean up most cheaply to sell their permits to those whose treatment costs are highest). 201. See Driesen, Cheap Fix?, supra note 8 at 42-43. 202. See Selmi, supra note 55, at 10,703. 203. See SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 53. 204. See Lohmann Declaration, supra note 121, at 10. 205. See id. at 23; see generally SCAQMD, Board Meeting June 12, 1998, supra note 126. 278 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 lowing industry to choose cheap fixes while little pollution reduction has actually occurred.206 Additionally, some individual companies that reported actual emission reductions relied on process changes that could have re- sulted anyway under the previous technology-based regulatory re- gime. In a survey of those companies who reportedly installed pollu- tion control equipment in order to comply with RECLAIM, 1,305 tons per year of NOx emissions were reduced. By comparison, more than 9,000 tons per year of NOx reductions took place in the same time frame as a result of discretionary implementation of control equipment initiated under the rules prior to RECLAIM.207 This illus- trates how emissions trading has muted the incentive to innovate. Contrary to the view of many academics, there are theoretical reasons to doubt that significant innovation will take place under a pollution trading regime. Empirical evidence from Los Angeles demonstrates that the incentive to innovate appeared to be much stronger under a technology-based regulatory regime. In short, emis- sions trading has allowed industry to choose a cheaper option at the expense of technological innovation and emissions reduction.
3. Public Participation Suffers Under a Pollution Trading Regime Public participation is a tenet of democratic government and en- vironmental policy making. Some academics argue that pollution trading enhances meaningful public participation. Yet, existing pol- lution trading programs effectively exclude the public (and to a large extent, government agencies) from the decision making process about industrial pollution. Most states have permitting procedures through which affected community members can advocate for pollution control requirements on facilities. However, pollution trading allows facilities to avoid those permit requirements—usually without the knowledge or in- volvement of the affected community. Pollution trades made pursu- ant to Rule 1610 and RECLAIM are not subject to public review or comment. In fact, the public faces numerous difficulties finding out what companies are trading to avoid compliance with pollution con-
206. See Marla Cone, AQMD Tightens Rules of Car Scrapping, Environment: Vehicles must be roadworthy. Panel adds 100 compounds to list of restricted toxic chemicals, L.A. TIMES, July 11, 1998, at B3. 207. See SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 44-45. Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 279 trol standards.208 For instance, RECLAIM credits can be purchased from independent brokers, without any environmental agency or public oversight.209 A company wishing to increase or continue its pollution need only purchase the required credits on the open mar- ket, without any public review or comment. In this way, the demo- cratic will, as represented in permit and regulatory requirements im- posed after full public review and comment, can be reversed by a simple economic transaction. Sunstein, Ackerman, and Stewart hold that pollution trading promotes democracy and public participation. However, under Rule 1610 and RECLAIM, company management decides whether to re- duce emissions or to use pollution credits.210 Profit, not public health, becomes the deciding factor.211 Thus, as Heinzerling notes, “in decid- ing whether to adopt a trading program or some other regulatory strategy, ‘democracy’ cannot be counted on the side of pollution trading.”212 As Rule 1610 demonstrates, when “pollution trading pro- grams do not assure meaningful citizen participation in decisions about the environment, then the distributional objection goes unmet: some non-consenting citizens must endure greater pollution, in the service of reducing the overall costs of environmental compliance.”213
4. Monitoring and Enforcement are More Difficult Under a Pollution Trading Regime Pollution trading creates new difficulties concerning monitoring and enforcement. Accurate accounting of actual emissions facilitates an honest market in which emissions reduction claims are verifiable and enforceable. Pollution trading relies more on accurate emissions accounting than does a technology-based strategy. Yet, accurate
208. Public participation has proven very successful as a tactic to prevent and reduce pollu- tion. For example, the Toxic Release Inventory data which is required by the Emergency Planning and Community Right to Know Act has proven very successful in mobilizing public opposition that has lead to pollution prevention and reduction. See generally Luke W. Cole, Empowerment as the Key to Environmental Protection: The Need for Environmental Poverty Law, 19 ECOLOGY L.Q. 619 (1992); Gauna, supra note 177. 209. See SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 55. 210. See SCAQMD, Offset Programs, supra note 60, at Rule 1610; SCAQMD, RECLAIM Rules, supra note 62, at Rule 2000-2015. 211.Cf. Heinzerling, supra note 9, at 318 (noting that the history of the 1990 Clean Air Act Amendments challenges the view that “establishing a system of marketable permits will pro- mote democratic values, such as deliberation, decentralization, and freedom from faction. . . . In reality, Congress paid little attention to [debating the overall pollution limits]. . . [and] the 1990 Amendments owes much of its content to the influence of special interest groups.”) 212. Id. at 343. 213. Id. 280 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 monitoring requires costly investments in technology and intrusive public accounting of chemical use data, measures traditionally op- posed by industry. And, of course, market theorists decry such ad- ministrative requirements or other restrictions because they raise transaction costs, thus interfering with the free hand of the market- place.214 The RECLAIM program recognized the need to verify that trading credits represented real emission reductions, not just progress on paper.215 RECLAIM requires that major sources use continuous emissions monitors (CEMs) to measure NOx and SOx releases from industrial facilities.216 Despite the availability of this proven technol- ogy for constantly measuring pollutants in industrial stacks, these RECLAIM provisions were criticized by industry lobbyists because of the additional costs associated with data reporting and the installa- tion and operation of CEMs. However, CEMs were required despite industry opposition, underscoring the program’s intent to produce the data that enables creditable tracking of emissions.217 To verify in- dustry’s claimed reductions, the RECLAIM program requires CEMs to monitor actual emissions from industrial stacks at major sources.218 However, an audit of the RECLAIM program found that indus- try has been slow to comply with the CEM requirements.219 After the first year, thirty percent of the RECLAIM facilities had still not in- stalled properly operating CEMs.220 Although most CEMs are now certified, electronic data reporting requirements were still being vio- lated forty percent of the time by major sources, and eighty percent
214. See KUTTNER, supra note 132, at 6. 215. See Selmi, supra note 55, at 10,703-704; SCAQMD, RECLAIM Rules, supra note 62, at Rule 2004(b). 216. See Selmi, supra note 55, at 10,704-705; SCAQMD, RECLAIM Rules, supra note 62, at Rule 2012(c)(2)(A). 217. See Selmi, supra note 55, at 10,704-705; see also SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 75; Southern California Gas Company, Position Paper: Regional Clean Air Incentives Market (RECLAIM) 2 (1993) (on file with authors). In the car scrapping program, in contrast, it’s impractical to monitor emission reductions because the program is based on projections of emissions avoided in the future. As discussed above, these projections have been grossly over inflated.
218. RECLAIM exempted smaller NOx and SOx sources from using continuous emissions monitoring. See SCAQMD, RECLAIM Rules, supra note 62, at Rule 2012. Instead, SCAQMD relies on emissions factors for these smaller sources. Such emission factors may be inaccurate according to U.S. EPA, because some emissions factors are derived from tests that may vary by an order of magnitude or more. Even when the major process variables are accounted for, emission factors developed may be the result of averaging source tests that differ by factors of five or more. See U.S. EPA , AP-42 , supra note 113, at 3. 219. See SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 76-77. 220. See id. at 77. Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 281 of the time by small sources.221 As a result of poor compliance with emissions reporting requirements and continued industry opposition to comprehensive monitoring, SCAQMD’s ability to verify claimed emission reductions from large sources of NOx and SOx remains in doubt. Emissions of VOCs are difficult to monitor accurately because millions of sources release VOCs from everyday activities, and VOCs evaporate into the air instead of being emitted from a stack. VOC trading was dropped from the original RECLAIM proposal because the monitoring and enforcement challenges were so severe.222 CEMs are impractical for pollutants with many individual sources, and VOCs have multiple sources. For example, most VOC emissions are from leaks from thousands of pieces of equipment (so-called fugitive emissions) or evaporation from direct use of thousands of VOC- containing products (e.g. spray paints).223 Claimed VOC emission reductions can best be verified through source testing or a materials balance that accounts for all use of the polluting material and all the releases of the same pollutant from all sources.224 Tracking chemical use data provides the means of meas- uring the major inputs of a polluting material.225 Industry, however, has strongly opposed proposed policies to publicly report chemical use data. Air pollution agencies have traditionally sought to main- tain as confidential the amount of chemicals used by individual indus- trial plants, making independent verification impossible. These monitoring concerns become more significant to public health protection when the primary regulatory strategy is switched from technology-based regulations to emissions trading. Any ap- proach needs to ensure that emission reductions are real and verifi- able. Enforcement action cannot be taken in the absence of a strong verification mechanism.
221. See id., at 84-85. 222. See Selmi, supra note 55, at 10,697. 223. According to the U.S. EPA, “there are hundreds of thousands of sources of VOC emissions including automobile emissions, gasoline vapors, chemical solvents, and consumer products like paint.” See U.S. Environmental Protection Agency, Office of Air Quality Plan- ning and Standards, Regional Approaches to Improving Air Quality: Ground Level Ozone (last modified Aug. 27, 1997)
Under the command and control technology-based approach, emissions uncertainties are less relevant. The important question is whether the pollution control action was taken or not. Regardless of the pollution control strategy employed, it is a simple matter to verify whether equipment was installed and is properly operating, or a process changed or a raw material substituted. Although uncertainty remains over actual emissions, verification of compliance with tech- nology-based pollution control requirements ensures that emissions have declined, usually by significant amounts. To avoid impeding the trading market, the RECLAIM program verifies transactions after the fact and does not examine the under- lying actions to ensure that claimed emission reductions are real.226 SCAQMD simply verifies that all the paperwork is in order after the trade has already taken place.227 At the end of the allotted time pe- riod, the agency ensures that enough emission reductions credits are in hand at each facility to match the requirement to reduce emissions by a certain percentage.228 Credits are based on claimed emission re- ductions, which are subject to great uncertainty.229 In the trading pro- gram, industry makes many diverse emission reduction claims.230 Even if significant agency resources were available, it is impractical to verify that all emission reduction claims are real and accurate. This diffusion of accountability for reducing emissions renders pollu- tion trading programs inherently less enforceable than technology- based regulations.231 Monitoring and enforcement issues are further complicated when inter-source trading is allowed. For now, RECLAIM is a closed trading program where only stationary sources (larger indus- trial plants) may participate. However, pollution trading advocates want to open the market so that industrial polluters can avoid reduc- ing pollution further by using credits earned from emissions reduc- tions from area sources (small, diverse sources, such as dry cleaners, and spray can usage) and mobile sources (e.g. cars, trucks, and buses).232 The Rule 1610 car scrapping program shows that stationary
226. See SCAQMD, RECLAIM Rules, supra note 62, at Rule 2004(b); see also Selmi, supra note 55, at 10,702;. 227. See Selmi, supra note 55, at 10,704. 228. See id at 10,704; SCAQMD, RECLAIM Rules, supra note 62, at Rule 2004. 229.See discussion supra Part II (about emissions factors). 230. See SCAQMD, RECLAIM PROGRAM AUDIT, supra note 112, at 29. 231. See Driesen, Emissions Trading, supra note 6, at 303-04. 232. See SCAQMD, Air Quality Investment Program, supra note 74. Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 283 to mobile source trading multiplies the potential for false claims of reductions.233 Industrial polluters (i.e. stationary sources) want to continue to avoid making investments in reducing their own emissions by taking advantage of inter-source credits which represent grossly inflated emission reduction claims or emissions that would have been reduced anyway through actions that would be taken without trading. In fact, in order to meet environmental and public health goals, significant reductions are needed from all sources.
IV. RECOMMENDATIONS AND IMPLICATIONS Having determined that pollution trading has serious empirical and theoretical difficulties, we recommend a proposal for domestic, urban pollution trading programs. These recommendations are an attempt to avoid the pit-falls associated with the Los Angeles pollu- tion trading experiments. However, pollution trading has increas- ingly been recommended at the international level to combat global climate change.234 The Los Angeles experience with trading has im- portant implications for the international arena as well. Finally, al- ternatives to trading are discussed that may avoid some of the inher- ent difficulties associated with pollution trading
A. Proposals for Urban Air Pollution Trading Programs We propose a series of reforms for EPA to adopt in revising its guidance on Economic Incentives Programs (EIPs), based on the documented experience with pollution trading in Los Angeles. These measures would avoid or mitigate the problems reviewed in this arti- cle.
1. Prohibit Toxic Trading The EIP should forbid the trading of toxic substances.235 This is the most straightforward way to reduce the risk of creating toxic hot- spots from pollution trading programs. Such a rule would allow con- tinued trading of other air pollutants not classified as toxic, such as
NOx and SOx, through programs such as the national acid rain trading
233. See discussion supra Part II.B.1-B.2. 234. See JONATHAN BAERT WIENER, DESIGNING GLOBAL CLIMATE POLICY: EFFICIENT MARKETS VERSUS POLITICAL MARKETS 5 (Center for the Study of American Business Policy Study No. 143, 1997). 235. As defined in the Emergency Planning and Community Right-To-Know Act. See 42 U.S.C. § 11001 (1998). 284 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 program or limited closed market programs such as the current RECLAIM program.
2. Prohibit Trading into Overburdened Communities EPA should prohibit trading into overburdened communities. Because industrial polluters tend to cluster in low income neighbor- hoods and communities of color, allowing those sources to increase pollution seriously threatens to further overburden such communi- ties. The burden on these communities should be measured by a cu- mulative risk threshold that accounts for reproductive harm, cancer risk, acute health risks, and risks to the most sensitive individuals, such as children. Such measurements should include the cumulative risk from all facilities affecting a particular community.
3. Assess and Prevent Toxic Hot-spots and Discriminatory Impacts EIPs should require a demographic analysis of affected commu- nities before the approval of any trading program and should prohibit trading programs that are projected to have a disproportionately ad- verse impact on low-income communities of color. Economic models exist that allow agencies to accurately predict which facilities are likely to purchase pollution credits, thereby increasing or continuing their pollution, by comparing control costs across regulated source categories.236 Facilities with low costs of control are likely to comply with control requirements and generate pollution credits, while facili- ties with high costs of control are likely to purchase pollution credits and avoid installing pollution control equipment. The model results can be mapped to determine where pollution is likely to increase if a revised trading program is approved, and whether low income people of color are impacted.
4. Prohibit Trading Out of Reasonably Available Control Technology (RACT) Requirements In order to ensure reasonable further progress, the EIP should not allow industry to use trading programs in lieu of compliance with pollution controls that constitute Reasonably Available Control Technology (RACT).237 The Clean Air Act states that a fundamental
236. A model prepared by Regional Economic Modeling Inc. (REMI) has been used by California’s South Coast Air Quality Management District for socio-economic impact assess- ment as part of the development of Air Quality Management Plans, and could be adapted for this purpose. See generally Johnson & Pekelney, supra note 112. 237. See 42 U.S.C. § 7502(c)(1) (1998). Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 285 goal is to ensure pollution reduction at the source whenever feasible, while one of the stated goals of the EIP is to foster technological ad- vancements. Allowing companies to trade out of compliance with RACT rules undermines both of these goals. Ensuring that all com- panies install feasible technology (RACT) establishes a technology- based floor to safeguard public health in all communities.
5. Prohibit Cross-Pollutant Trading No facility should be allowed to increase or continue its emis- sions of air pollutants by purchasing pollution credits generated through reduced emissions of less hazardous pollutants. This would require a comparison of the chemical composition of the emissions reduced for credit with the chemical composition of emissions main- tained by purchase of credits to ensure that they represent equivalent environmental impacts; this requires consideration of toxicity, co- pollutants, and precursors. Such cross-pollutant trading presents sub- stantial risks of creating toxic hot-spots and increasing the overall toxicity of pollutants released.
6. Allow Affected Communities to Review and Comment on Proposed Trade Any proposed pollution trade that will result in an increase or continuation of toxic chemical emissions in a given community should first be subjected to a public comment and review period, in- cluding notification to the affected communities. This should be con- ducted in accordance with the Model Plan for Public Participation developed by EPA’s National Environmental Justice Advisory Council (NEJAC).238 The agency administering the trading program must retain discretion to reject or amend the proposed trade based on community comments.
7. Ban Inter-Source Trading (between Mobile, Stationary and Area Sources) The only way to eliminate the environmental justice impact caused by inter-source trading is to eliminate this form of trading. Mobile to stationary source trading presents particular risks of toxic hot-spot creation in communities of color and undercounting of emis- sions. Similar concerns would be presented by trading area source
238. See NATIONAL ENVIRONMENTAL JUSTICE ADVISORY COUNCIL, PUBLIC PAR- TICIPATION AND ACCOUNTABILITY SUBCOMMITTEE, THE MODEL PLAN FOR PUBLIC PAR- TICIPATION 1-9 (1996). 286 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 credits with stationary sources. Since these risks are inherent due to the nature of the trading program, they must be eliminated. Station- ary to stationary source trading as well as mobile to mobile source trading would still be allowed.
8. Prohibit Hot Air Credits that Result from Over-Allocating the Baseline The initial allocation of credits for any emissions trading pro- gram should be based on actual emissions, not historically higher lev- els. If trading proponents are truly committed to environmental im- provement and economic efficiency, then they ought to rigorously insist that the supply of credits not exceed the demand. A glut in is- sued credits depresses prices, stifles investments in pollution controls, and misleads the public by making them think that emissions have ac- tually been reduced.
B. Implications for the Climate Change Policy Debate Many of the same problems documented in Los Angeles are likely to be replicated internationally should pollution trading remain the central strategy advanced for reducing greenhouse gases, like carbon dioxide, to slow global climate change. Under global climate change, the justice concerns take on a larger dimension and the sti- fling effect of pollution trading on technological innovation has more profound consequences.239 The hot air credits problem has already taken shape. Since the collapse of the Russian economy, that country’s carbon dioxide emis- sions have dropped by more than thirty percent below 1990 levels.240 Under the Kyoto Accords, Russia will be granted emission credits as if the economic collapse had never occurred. This will allow Russia to either increase its production levels, or to sell its thirty percent ex- cess emission credits to other countries. As a result, cash-rich, high- polluting countries like the United States will be able to avoid politi- cally painful decisions to reduce pollution domestically by purchasing “hot air” credits from Russia. The vast over-allocation of hot air credits will even allow developed countries to increase emissions for
239. See Michael Belliveau, Smoke and Mirrors: Will Global Pollution Trading Save the Climate or Promote Injustice and Fraud? CORPORATE WATCH (October 1998) (last modified Mar. 1, 1999)
241. See G. TYLER MILLER, JR., LIVING IN THE ENVIRONMENT: PRINCIPLES, CON- th NECTIONS, AND SOLUTIONS 56, 292 (8 ed. 1994). 242. See Belliveau, supra note 239. 243. See id.; see generally Driesen, Cheap Fix?, supra note 8. 244.See Daphne Wysham, Profiting from Pollution, SAN JOSE MERCURY NEWS, Nov. 22, 1998, at 1P; See generally Driesen, Cheap Fix?, supra note 8; THE SUSTAINABLE ENERGY AND ECONOMY NETWORK (INSTITUTE FOR POLICY STUDIES, USA) AND THE INTERNATIONAL TRADE INFORMATION SERVICE (USA), THE WORLD BANK AND THE G-7: STILL CHANGING THE EARTH’S CLIMATE FOR BUSINESS (1998). 245. See Wysham, supra note 244, at 1P. 288 DUKE ENVIRONMENTAL LAW & POLICY FORUM [Vol. 9:231 global pollution credit market, which is projected to reach $150 bil- lion in trading by 2020.246 This dual role will enable the World Bank, along with its partner corporations, to “double dip”, profiting from the expansion of inefficient fossil fuel technology in the developing world, then again when easy efficiency improvements generate cred- its that relieve responsibility for reducing emissions from industrial- ized countries.247 U.S. interests are pushing hard for rapid creation of a global pollution trading program, including proposed legislation in Congress that would guarantee U.S. companies early credit greenhouse gas re- duction projects while the details of the international pollution trad- ing regime are being worked out.248
C. Alternative Market-Based Policy Approaches Unfortunately, little consideration has been given to alternative market-based policies, which suffer from few of the inherent limita- tions of pollution trading. If technology-based regulations were re- tained as the floor, then supplementary market oriented programs would accelerate the transition away from polluting technologies. By reforming subsidy programs to eliminate huge government invest- ments in fossil fuels and other polluting technologies, and by redi- recting investments toward clean technology, like solar electric and hydrogen power, market forces would be reoriented to reduce pollu- tion.249 Pollution taxes have been proposed as another market-based approach to reduce pollution.250 Taxes could be increased on carbon intensive fuels and other toxic products. The more pollution a facility generated the higher its tax on emissions. A variation on pollution taxes, called tax shifting, would move taxes away from activities to be encouraged, like wages and savings, and instead increase taxes on polluting products and emissions to discourage environmental
246. See id. 247. See id. 248. See Industries Push for Emissions Credits: Firms Want to Ensure Credit for Reductions of a Global Warming Treaty is Passed, SAN JOSE MERCURY NEWS, Jan. 3, 1999, at 6A. 249. See generally David Malin Roodman, THE NATURAL WEALTH OF NATIONS: HARNESSING THE MARKET FOR THE ENVIRONMENT 29-110 (1998); LESTER R. BROWN ET AL., SAVING THE PLANET: HOW TO SHAPE AND ENVIRONMENTALLY SUSTAINABLE GLOBAL ECONOMY 48-63 (1991). 250. See generally Frank Muller & J. Andrew Hoerner, Greening State Energy Taxes: Car- bon Taxes for Revenue and the Environment, 12 PACE ENVTL. L. REV. 5 (1994); HAMOND, su- pra note 158. Spring 1999] LOS ANGELES’ FAILED EXPERIMENT 289 harm.251 By maintaining a progressive tax structure and using some of the tax funds generated to compensate displaced workers and com- munities impacted by the shift to clean technology, pollution taxes could avoid any economic injustice in their implementation.252 Free market ideologues fervently embrace market incentive pro- grams, like pollution trading, but tend to fall silent or oppose market disincentives, like pollution taxes or the elimination of harmful sub- sidies. Given the results of pollution trading in Los Angeles, the de- bate appears to be less about how to harness market forces to fairly reduce pollution, and more about how to protect and enhance profits for powerful economic interests.
CONCLUSION An evaluation of the world’s oldest and largest pollution trading programs for urban air quality reveals immorality, injustice, and inef- fectiveness in their outcomes. As demonstrated in Los Angeles, the more unrestricted an emissions trading program, the more likely that unjust hot-spot impacts, over allocations, and fraudulent transactions will result. Yet reforms needed to improve the environmental per- formance and mitigate the adverse impacts of pollution trading erase the cost savings and regulatory flexibility touted by its advocates. These reforms should be aggressively pursued, especially for current and proposed smog trading programs.253 Serious restrictions are needed on the proposed global pollution trading system to prevent the worst abuses of an inherently flawed environmental policy tool. However, protecting public health, civil rights, and economic security would be better realized by halting further reliance on pollution trading. Instead, an effective floor of clean technology-forcing regu- lations, enhanced by other market-based strategies such as subsidy reform and progressive pollution taxes, provide the best means of en- suring a just, participatory, and environmentally sustainable future.
251. See David Malin Roodman, Building a Sustainable Society, in STATE OF THE WORLD 1999, at 169, 171-74 (1999). See generally HAMOND ET AL., supra note 158. 252. See generally HOERNER, supra note 159; Roodman, supra note 251. 253. See discussion supra Part IV.A.